How profitable is day-trading?: A study on day-trading in Korean stock market

Abstract

This paper analyzes the profitability of day-trading in Korean stock market. Day-trading is defined as a trading strategy where an investor both buys and sells a stock repetitively on a trading day and finishes the trading day without any inventory of the stock. Day-trading by definition would incur relatively large trading costs and therefore, day-traders are more likely to be driven to achieve high returns on the trading to compensate for the large trading costs. Profitability of any trading strategy has been an interesting academic issue as well as a practical one since it would be another piece of evidence that contradicts the weak-form Efficient Market Hypothesis. Although day-trading in Korean stock market amounts to more than 30% of the total trading volume, and that there have been numerous debates over the need for regulation of those investors, academic research on day-trading has been very limited. Recently, Choe, Chung and Kho (2006) analyzed the trading behavior of day-traders in the Korea Stock Exchange and their impacts on the stock price movements, but they did not analyze the profitability of day-trading. No other domestic research, as far as the authors are informed, exists on day-trading, mainly due to the magnitude of the data and the analytic difficulties involved in the research. There are some foreign papers that analyze the profitability of day-trading strategy, and most of them find day-trading not profitable. Most similar to our paper, Barber, Lee, Liu and Odean (2004) analyzed the profitability of day-trading in the Taiwanese stock market and found more than 80% of day-traders incur losses over the 6 months trading period.