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How Profitable is Day Trading? A Study on Day-Trading in Korean Stock Market

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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 re- petitively 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 au- thors 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 ana- lyze the profitability of day-trading strategy, and most of them find day-trading not prof- itable. Most similar to our paper, Barber, Lee, Liu and Odean (2004) analyzed the profit- ability of day-trading in the Taiwanese stock market and found more than 80% of day- traders incur losses over the 6 months trading period.

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... Rossi studied calendar effects in the stock market of Italy and found that the calendar anomalies exist in the Italian stock market (Rossi and Fattoruso, 2017). Lee et al. (2007) examined the effectiveness of intraday trading for the stock market of Korea applying trading records of a four-month time and found that while few intraday traders earn profits, most of them, lose money due to abnormal transactions expenses. ...
... Most discussions of day trading seek to analyse the profits gained in different countries, such that Barber et al. (2004) consider the Taiwanese stock market, Linnainmaa (2005) investigates Finland's stock market, and Lee et al. (2007) research the Korean stock market. The results of these studies tend to indicate that day traders prefer to avoid trading losses but fail. ...
... Most discussions of day trading seek to analyse the profits gained in different countries, such that Barber et al. (2004) consider the Taiwanese stock market, Linnainmaa (2005) investigates Finland's stock market, and Lee et al. (2007) research the Korean stock market. The results of these studies tend to indicate that day traders prefer to avoid trading losses but fail. ...
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