The impact of speculative trading on stock return volatility: the evidence from Taiwan

In this article we take advantage of the market characteristics of Taiwan to examine the empirical evidence on the impact of speculative trading on return volatilities, in regard to the existing contrasting theories and limited empirical studies. Our results suggest that characterizations of speculative trades predicted by contrasting theories may exist in the market at the same time. The evidence indicates, consistent with the inventory hypothesis, that speculative trading activities through day trades increase the intraday price volatility and tend to exacerbate such volatility if the price rises on a particular day. An increasing level of margin debt, which measures the accumulative speculative trades, is, however, found to stabilize the market, thus, supporting the rational speculation hypothesis. We also find evidence of a significantly positive impact on return volatility as trading volume increases and as a response to the 1997 Asian financial crisis.