Heterogeneous Investor Behaviors and Market Volatility in the Tokyo Stock Exchange

This paper examines the relationship between weekly stock market volatility and trading activities of different investor groups, such as individuals, institutions, and foreigners, in the first section of the Tokyo Stock Exchange. We define investor behaviors as net trading flows and trading fractions in the total trading value at each period. We empirically examine the relationship between market return and different trading activities. For both measures, the trading activity of foreign investors is correlated differently with returns from domestic investors. We investigate the relation between volatility and trading activity. First, we show that the contemporaneous correlations between volatility and foreign investors are significant. Second, the results of dynamic relations show that trading flows of foreign investors are negatively correlated with the subsequent volatility, although fluctuations of the trading share are not associated with the subsequent volatility.