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.