The impact of day trading on traders´ profitability and market quality: Results from agent-based simulations of China´s stock market

The paper established an artificial stock market (ASM) with the parameters from China´s stock markets, which included both call auction and continuous auction systems, and represented bounded-rational heterogeneous trading behaviors with modified three-factor model of mixed trading strategy. Through simulations under different market status, the effect of day trading rules on traders´ profitability and market quality was studied. The result shows that day trading can reduce investment risk, but can not improve market quality significantly, especially market efficiency under current China´s stock trading rules and investor structure; it increased liquidity at the expense of volatility increments. Thus, we suggest that rational trading behaviors should be guided before permitting day trading.