Positive Feedback Trading Research Articles

Spatial linkages of positive feedback trading among the stock index futures markets

Positive feedback trading, a destabilizing sentiment-driven strategy, executes purchases after price upswings and vice versa, driving price away from economic fundamentals in the short term. We apply spatial econometric approach to investigate the linkages of positive feedback trading among the stock index futures markets of 27 countries from 2010 to 2023, and the empirical results reveal that there exist not only significant local effects but also strong spatial spillovers in positive feedback trading among these markets. Moreover, we find that the spatial linkages of positive feedback trading are stronger in an upward trend when market volatility exceeds 2 % but more pronounced in the downward trend when the market volatility exceeds 4 %. Overall, our empirical findings are of considerable concern for global investors who use index futures to hedge or exploit arbitrage opportunities, as well as inspiring for policymakers to manage financial derivatives trading risk.

Firm-level productivity and stock return: New evidence from China

This study provides novel insights into the stock return predictability related to the firm-level total factor productivity (TFP) in the China's stock market, covering the period from 1999 to 2020. Contrary to studies on other countries, our research identifies a positive correlation between the productivity of Chinese firms and their future stock returns. We suggest that this correlation is driven by mispricing rather than risk premium. Specifically, we argue that investors' difficulties in accurately assessing firm-level productivity and limited attention result in the inadequate incorporation of this information into stock prices. Furthermore, our analysis explores additional factors contributing to the observed productivity-related market anomaly, including investor overconfidence, positive feedback trading, lottery preference, information uncertainty, and limits to arbitrage, indicating investors' irrationality and behavioral biases. Importantly, our study also demonstrates that firm-level productivity serves as a reliable predictor of a firm's future profitability.

Feedback Trading and Its Implications for Return Autocorrelations in India During COVID

In emerging capital markets, feedback trading is a widely pursued strategy by investors. Such behavior may potentially lead to volatility and cause negative autocorrelation in market returns, especially during high volatility. In India, such a linkage has not been explored so far, though institutional investors have pursued feedback trading for the last two decades. Also, COVID-19 has led to higher volatility in the markets and might have altered investors’ behavior. This article focuses on finding whether feedback trading is still pursued by institutional investors in Indian equity markets post-COVID and also whether the presence of feedback traders exerts any influence on autocorrelations in market returns. Asymmetric GARCH models are employed to explore the linkage. Findings suggest that while foreign institutional investors continue to pursue positive feedback trading, as in the pre-pandemic period, domestic investors pursue negative feedback trading. However, in the post-pandemic period, as other types of trading became weak or perished, positive feedback traders have started dominating, leading to negative autocorrelation in market returns during heightened volatility. Evidence of negative autocorrelation was not present in the pre-pandemic period. Further, negative news leads to more volatility in returns. JEL Codes: F21, F32, G11

Indian Stock Market Drivers on a Cusp of Change: An Empirical Study

Domestic and Foreign institutional investors are professional investors who aim to profit from price movements in the stock market. These investors not only profit from their investments but also drive the stock market of any country. The study examines the association between Sensex Nifty 50’s movements and investing patterns of FIIs, DIIS and the causal relationship between stock market returns and institutional investments (FIIS and DIIs). The study also analyses the impact of FIIs and DIIs in driving the Indian stock market. The study employed correlation analysis, vector autoregression model, Block exogeneity Wald-test and the Granger causality test for the objectives. Our results indicate the gradual fall in the FIIs-DIIs ratio in the Indian stock market, making domestic institutional investors a prominent counterforce to FIIs and establishing it as an equal driver. DIIs act as positive feedback traders, while FIIs act as neutral to negative traders. The causality test demonstrates that market return has a significant impact on both the players, but neither FIIs nor DIIs have a significant impact on market movement.

Positive Feedback Trading in Meme Stocks: Swing Trading or Betting on Lotteries?

Positive Feedback Trading in Meme Stocks: Swing Trading or Betting on Lotteries?

Arbitrage opportunities and feedback trading in regulated bitcoin futures market: An intraday analysis

The study uses 5-min intraday Bitcoin futures and spot prices to investigate the additive and multiplicative impact of arbitrage opportunities on feedback trading in the Bitcoin futures market. The basis, equal to the difference between Bitcoin spot and futures prices, is used to proxy arbitrage opportunities. The study uses quantile regressions to capture different market conditions. The study documents episodic cases of positive and negative feedback trading. The resulting evidence reveals that the intensity and type of feedback trading largely depend on market conditions and the degree of arbitrage opportunities. From the multiplicative model, the impact of arbitrage opportunities on positive feedback trading is strongest in the extreme bear market, lowest in the regular market conditions, and absent in the bull market conditions. Channel “breakouts” analysis indicates positive feedback traders dominate during bear and normal market conditions. When the basis declines by varying magnitudes across quantiles, positive feedback trading shifts to negative feedback trading. The findings suggest widening basis intensifies negative feedback trading during bull market conditions. However, when the basis decreases by varying scales across upper quantiles, negative feedback trading switches to positive feedback trading. By observing the trading signals, investors can adjust their portfolio positions to maximize returns and minimize risk.

A Test of Positive Feedback Trading among Foreign Portfolio Investors in Nigeria

It has been established in the literature that the trading behavior of international investors may increase market vulnerability, especially for emerging markets. Consequently, this study examines whether positive feedback trading exists in the Nigerian stock market. Both descriptive and inferential analyses are carried out on monthly data covering the period 2013 to 2020. Specifically, the ARDL bounds testing approach is employed. Findings indicate that positive feedback trading exists in the market, as stock returns have positive and significant influence on foreign portfolio inflows. The results further show that this trading pattern becomes more prominent with rising economic growth. The findings again reveal that the exchange rate and the interest rate explain the foreign portfolio inflows in the Nigerian market. The study’s outcomes lend support for the pull theory in explaining the foreign portfolio inflow. However, no evidence is found in support of the push theory, as an explanation for the foreign portfolio inflow as the “OPEC basket crude oil price” is insignificant. It is thereby recommended that regulators should adopt measures that will help foreign investors to be better informed about the Nigerian market, in order to reduce their positive feedback trading behavior. Moreso, there is a need for the government to put in place policies targeted toward enhancing the growth of the stock market and the economy. In this way, the negative impact of such trading behavior will be minimal, as short-term trading by foreign investors will be reduced and the foreign portfolio inflows will be sustainable.

Discontinued Positive Feedback Trading and the Decline of Return Predictability

AbstractWe show that demand effects generated by institutional frictions can influence systematic return predictability patterns in stocks and mutual funds. Identification relies on a reform to the Morningstar rating system, which we show caused a structural break in style-level positive feedback trading by mutual funds. As a result, momentum-related factors in stocks, as well as performance persistence and the “dumb money effect” in mutual funds, experienced a sharp decline. Consistent with the proposed channel, return predictability declined right after the reform, was limited to the U.S. market, and was concentrated in factors and mutual funds most exposed to the mechanism.

Determinants and dynamic interactions of trader positions in the gold futures market

We investigate the determinants of different traders’ trading positions in the gold futures market. With a threshold value determined endogenously by our model, we find that when the gold futures price falls below the threshold, money managers adopt positive feedback trading strategies while swap dealers adopt negative feedback trading strategies. When the futures price rises above the threshold, money managers turn to negative feedback trading and swap dealers reduce the intensity of their negative feedback. In addition, money managers and swap dealers play the transmitter role in trading spillovers to other traders, and their trading transmitter role weakens during periods with high gold prices.

Feedback trading in the cryptocurrency market

PurposeThis paper aims to investigate feedback trading and autocorrelation behavior in the cryptocurrency market.Design/methodology/approachIt uses the GJR-GARCH model to investigate feedback trading in the cryptocurrency market.FindingsThe findings show a negative relationship between trading volume and autocorrelation in the cryptocurrency market. The GJR-GARCH model shows that only the USD Coin and Binance USD show an asymmetric effect or leverage effect. Interestingly, other cryptocurrencies such as Ethereum, Binance Coin, Ripple, Solana, Cardano and Bitcoin Cash show the opposite behavior of the leverage effect. The findings of the GJR-GARCH model also show positive feedback trading for USD Coin, Binance USD, Ripple, Solana and Bitcoin Cash and negative feedback trading for Ethereum and Cardano only.Originality/valueThis paper contributes to the literature by extending Sentana and Wadhwani (1992) to explore the presence of feedback trading in the cryptocurrency market using a sample of the most active cryptocurrencies other than Bitcoin, namely, Ethereum, USD coin, Binance Coin, Binance USD, Ripple, Cardano, Solana and Bitcoin Cash.

How do investors react to overnight returns? Evidence from Korea

We find a negative relationship between overnight and daytime returns on the Korean equity market. Overnight returns are positively (negatively) and nonlinearly associated with subsequent daytime returns when the overnight news is relatively good (bad). Trades by individual investors respond negatively to overnight returns, whereas those by domestic and foreign institutional investors exhibit positive-feedback trading behavior. Our findings challenge the conventional presumption about investors’ responses to overnight returns.

Impact of Investor Sentiment on Portfolio

ABSTRACT This study integrated investor sentiment into the binary system of the mean-variance portfolio model, to clarify the method affecting asset pricing through investor sentiment. The theoretical deduction and empirical research demonstrated that, investor sentiment can promote the vertical movement of the minimum variance set. This can lead to effective portfolio drift and subsequent changes in the investor recognized required rate of return. These findings, verified through theoretical conclusions and empirical evidence, explain investors’ extrapolated expectations and their behavior in positive feedback trading.

Destabilizing or passive? The impact of commodity index traders on equilibrium prices

We examine the price impact of traders on commodity futures markets. Following the framework of De Long et al. (1990), we empirically identify the existence of positive feedback traders, passive investors, and rational speculators in major global commodity futures markets. Our results show that index trader demand is negatively related to past commodity returns and is positively related to future commodity returns, as De Long et al. (1990) model predicts for passive investors. Furthermore, “non-reportable traders,” who are not obligated to report their positions to the regulators, behave like positive feedback traders, and interact significantly with commodity futures returns as well.

Bitcoin futures risk premia

AbstractThis paper presents an empirical analysis of bitcoin futures risk premia. Based on the relevant theories and empirical findings of commodity futures risk premia, we study a battery of predictors, including position‐based measures, market microstructure factors, and macroeconomic variables. We find that trading activity and extreme sentiment of speculators and retailers present significant predicting power on the subsequent bitcoin futures price changes over different time horizons. We also find evidence that the lower transaction cost, the higher bitcoin futures risk premiums. Regarding macroeconomic variables, financial conditions index, TED spread, US M2 money stock, and funding cost of financial institutions could predict bitcoin futures returns. The return impact of net position changes of hedgers is likely to be affected by extremes in macroeconomic variables. Speculators behave like negative feedback traders, while retailers are positive feedback traders. This detailed analysis of the risk premia of this emerging derivatives market provides critical implications.

Investor sentiment spillover effect and market quality in crude oil futures

This study examines the influence of investor sentiment on trading behavior in crude oil futures. We find that money manager traders (i.e., hedge funds) adopt positive feedback trading strategies in normal periods and turn to negative feedback trading in pessimistic periods. Meanwhile, swap dealers adopt negative feedback trading in normal periods and reduce the intensity of their negative feedback trading during pessimistic periods. We also find that the sentiment-driven trading of money manager traders and swap dealers does not hurt the quality of the crude oil futures market in either pessimistic or optimistic periods. In contrast, producers' (hedgers’) positions increase volatility and pricing errors in the crude oil futures market.

Minimum Shareholding Proportion of Equity Funds and Stock Volatility Evidence from a Quasi-Natural Experiment

China’s fund market is getting bigger and bigger. By September 2021, the number of funds in the market had exceeded 8000, with a net value of nearly 24 trillion yuan. Among them, the number of equity funds has doubled compared with 2015, and the net value has increased four times compared with 2015, and it still maintains a rapid growth momentum. Do mutual funds play a role in market stabilization? To demonstrate this issue, we combined the passive trading technique with the positive and negative feedback trading strategies and explained how the minimum position ratio of equity funds affects stock price volatility. Then, using empirical data, we apply the difference-in-differences model to analyze how shifting proportions of the equity funds’ lowest shareholding affects stock volatility. The result shows that the volatility of high-institutional stocks was significantly reduced in comparison with other stocks after 2014. This result is further confirmed in the stocks held by large-scale funds. We used PSM-DID to solve potential endogenous problems and found that the results still support the hypothesis. This evidence supports the point of statement that the equity funds in the Chinese capital market can stabilize the market especially after 2014.

Disagreement between hedge funds and other institutional investors and the cross‐section of expected stock returns

AbstractWe find strong disagreements between hedge funds and other institutions in their common stock trades are twice as likely as agreements. Overall success of hedge funds’ trades and poor performance of non‐hedge funds’ trades are both confined to disagreement stocks. Although hedge funds are commonly positive feedback traders, they are neither positive nor negative feedback traders for stocks heavily sold by other institutions. Hedge funds also depend less on earnings news. Our findings highlight the importance of disagreement in studying the performance of institutional investors’ trades and are consistent with the notion that skilled investors rely less on public information.

Feedback trading in global stock markets under uncertainty of COVID-19

PurposeAlthough some research has been carried out on feedback trading in different asset classes, there have been few empirical investigations that consider both major and emerging stock markets (Koutmos, 1997; Antoniou et al., 2005; Kim, 2009) stock index futures (Salm and Schuppli, 2010). In this study, the author examines positive/negative feedback trading in both developed-emerging-frontier-standalone (51) stock markets for 2010–2020 and sub-periods including COVID-19 period.Design/methodology/approachThe hypothesis “feedback trading behaviour led the price boom/bust in the stock markets during the first quarter of COVID-19 pandemic” is tested by employing the Sentana and Wadhwani (1992) framework and using asymmetrical GARCH models (GJRGARCH, EGARCH) in accordance with the empirical literature.FindingsThe following conclusions can be drawn from the present study; (1) There is no evidence to support a significant distinction between developed, emerging, frontier or standalone markets or high/upper middle, lower middle income economies in the case of feedback trading. It is more likely to be a general phenomenon reflecting the outcomes of general human psychology (2) in the long term (2010–2020) based on the feedback trading results Asian stock markets appear to be far from efficiency.Research limitations/implicationsStock markets are selected based on data availability.Practical implicationsSeveral inferences can be drawn about overall results. First, investors and portfolio managers should beware of their investment decisions during bearish market conditions where volatility is on the rise and also when there is a strong reaction to bad news/negative shocks in the market. Moreover, investing in Asia stock markets may require more attention since those markets are reputed to be more “idiosyncratic”, less reliant on economic and corporate fundamentals in their pricing. Moreover, the impact of foreign investors on stock market volatility and returns and weaker implementation of regulations also affect the efficiency of the markets (Lipinsky and Ong, 2014).Originality/valueTo the best of the author’s knowledge, most studies in the field of feedback trading in stock markets have only focused on a small sample of countries and second, the effect of COVID-19 uncertainty on the stock markets have not been addressed in the literature with respect to feedback trading. This paper fills these literature gaps. This study is expected to provide useful insights for understanding the instabilities in stock markets particularly under conditions of high uncertainty and to fill the gap in the literature by comparing the results for a large sample of countries both in the long term and in the pandemic.Highlights for reviewThis study has shown that feedback trading is more prevalent in Asian stock markets in the long run in Europe, America or Middle East for the period 2010–2020.Positive feedback traders generally dominated most of the stock markets during the early period of COVID-19 pandemic.Another major finding was that the stock markets in Malaysia, Japan, the Philippines, Estonia, Portugal and Ukraine are dominated by negative feedback traders which may be interpreted as “disposition effect” meaning that they sell the “past winners”.In Indonesia, New Zealand, China, Austria, Greece, UK, Finland, Spain, Iceland, Norway, Switzerland, Poland, Turkey, Chile and Argentina neither positive nor negative feedback trading exists even under uncertain conditions.

Trading Behaviour of Foreign Institutional Investors: Evidence from Indian Stock Markets

The existence of behavioural bias such as positive feedback trading (PFT) and herding is well researched for advanced economies. This paper explores whether foreign institutional investors (FIIs), a prominent investor group, pursue these strategies in India. The contribution lies in the application of multiple measures of herding. Results indicate that FIIs exhibit PFT behaviour in equity and to some extent, in debt. At the individual stock level, FIIs herd during non-extreme market conditions, but market-level measures indicate absence of herding in extreme market conditions. In the bullish market, they behave more rationally compared to bearish or normal market conditions.

Asymmetric positive feedback trading and stock pricing in China

Defining asymmetry of feedback trading (AFC) as the difference between buying-winners and selling-losers intensities, the paper investigates if AFC impacts stock pricing. We show that buying stocks with low AFC and selling stocks with high AFC makes significant positive returns after controlling traditional pricing factors. The return mainly comes from the long leg and cannot be simply attributed to either mispricing, liquidity, or risk premium. Further study shows that the negative impact of AFC on future stock return is reinforced with an increase in past returns, maximum daily return, relative valuation level, asset growth rate, or operating profit rate. As AFC represents retail trading intensity, the results imply that the inactiveness of retail investors may make price relative underreaction to good news and thus lead to positive expected stock return.