Trading behavior in volatile markets: an exploratory investigation into Thai markets

Abstract

This study is an exploratory investigation into trading behavior within volatile markets. It examines several aspects of trading behavior by various types of market participants (local retail investors, local institutional investors and foreign investors) during volatile markets. Issues investigated in the study include abnormal trading activity, the impact of trading activity, and the causality between prices and volumes of securities on the foreign board compared to that seen on the main board, as well as with warrants and their underlying assets. The quality of the market during volatility as opposed to a ‘normal’ market is also examined. Using the intraday market data on the Stock Exchange of Thailand (SET) during a period from 1999 to 2003, first, it was found that domestic retail investors seemed to follow contrarian trading strategies, while institutional and foreign participants seemed to be momentum traders. However, institutional and foreign investors were seen more sensitive to market conditions and adjusted their trading activities in a risk adverse manner. Second, abnormal trading activity was observed and found to be more pronounced during extreme ‘bull’ market surges than during extreme ‘bear’ markets. Based on a study of related evidence, however, such overreaction was not found to be strong. Retail investors’ trading tended to have more of an impact on prices than those of other investor categories. However, the directions they took were opposite to what we would have expected. Third, our results showed that, generally,there were positive contemporaneous associations between the price changes/trading volumes in securities on the main board, and the price changes and trading volumes of corresponding securities on the foreign board, as well as with warrants and their underlying assets, regardless of market conditions. Finally, the results confirmed our expectation that the quality of exchange during normal periods was better than during volatile periods.