Positive Feedback Trading Behavior Research Articles

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.

The determinants of positive feedback trading behaviors in Bitcoin markets

This study investigates the positive feedback trading behavior in Bitcoin markets and analyzes its potential determinants. Our results show significant evidence of positive feedback trading behaviors for Bitcoin and the infectious disease equity market volatility tracker index (EMVID) increases Bitcoin volatility. Combining rolling window estimations with regression analysis, we find that market uncertainty that is measured by EMVID, the distance between short- and long-term moving averages of Bitcoin's trading volumes, and Bitcoin prices exceeding their 21-day moving average are positively correlated with future positive feedback trading behaviors during the COVID-19 pandemic. Further, left-tailed risk contributes negatively to this behavioral anomaly.

Stock Price Manipulation: Corporate Actions and the Exploitation of Retail Investors in China

Using account level data from the Shanghai Stock Exchange, we find widespread evidence consistent with insiders manipulating share prices to exploit naive retail investors. We identify a group of “suspicious” firms that use stock splits—perhaps, along with other misleading activities—to artificially inflate their share prices. Retail investors are strongly attracted to these suspicious splits, providing insiders an opportunity to sell large blocks of shares or use their shares as collateral for loans. A group of large accounts exploits the positive feedback trading behavior of naive retail investors by accumulating positions before suspicious split announcements and selling in the post-split period.

The Impact of Foreign Investors on the Stock Price of Korean Enterprises during the Global Financial Crisis

This paper investigates the impact and behavior of foreign equity investment on the price of the nine largest KOSPI (Korea Composite Stock Price Index) enterprises and Samsung Electronics preference stocks in terms of market capitalization during the global financial crisis (2 January 2007 to 30 December 2008). The empirical results indicate that foreign investors show strong, positive feedback trading behavior with regard to the stock price of Samsung Electronics, which is the largest KOSPI enterprise in terms of market capitalization. We also found evidence that the behavior of foreign investors significantly increased volatility in the stock returns of the two largest Korean conglomerates (Samsung Electronics and Hyundai Motors), which account for approximately 25 percent of total KOSPI market capitalization.

Positive Feedback Trading and Investor Sentiment

ABSTRACTThis article examines how investor sentiment affects positive feedback trading behavior. By analyzing the daily closing total return of CSI 300 index and its individual returns of stocks, we find that relatively high or low sentiment induces active positive feedback trading. With a specific indicator of sentiment, we explain the microstructure setting of the relationship between positive feedback trading and sentiment. We adopt the classical feedback model from Sentana and Wadhwani (1992) to measure positive feedback trading behavior. By adding sentiment factor to the model, we successfully explain how sentiment influences the behavior of both feedback traders and rational investors. The empirical findings suggest that positive feedback traders are more likely to trade when the prices of most securities move forward together. When the sentiment of feedback traders is at an intermediate level, the feedback trading behavior is insignificant.

Research on the Impact of Short Selling Mechanism on Investors’ Positive Feedback Trading Behavior

With the background of China’s Margin Trading pilot, the paper studies the effect of short selling mechanism on investors’ positive feedback trading behavior. The research results show that positive feedback trading behavior exists in Chinese stock market, and the launching of the short selling mechanism inhibits effectively the positive feedback trading behavior. Investors can show their pessimism towards the stock price by going short selling, thus the stock price can return quickly to the basic value. At the same time, leverage effect consists in the stock market, namely that investors react more strongly to bad news than to good news. After the implement of margin trading and short selling mechanism, the risk hedging mechanism increases, and investors in the market generally tend to react rationally to good news and bad news.

The Asymmetric Positive Feedback Trading in Individual Stocks: China's Evidences

Based on 4 years data of individual stocks in SZ300P index, the paper investigates the positive feedback trading behavior and its asymmetry. Regressions with heterogeneous belief terms show the presence of positive feedback trading in Chinese market. The traders who react to daily, weekly or monthly returns all exist in the market. The asymmetric pattern of positive feedback trading in individual stocks is quite different from that in developed markets and the findings in index data: The volume and order imbalance both rise more after price rises than those after price declines. An updated Sentana-Wadhwani model confirms the existence of this kind of asymmetric positive feedback trading. The asymmetric positive feedback trading tends to be more intensive in small-cap and high-liquid stocks, and this partially explains the contrast asymmetry between individual stocks and indexes.

Re-Examining the Impact of FII Investments on the Indian Markets

This paper examines the impact of daily foreign institutional investors’ (FIIs) investments on the Indian market from January 2010 through January 2014. The motivation for the study is that the past studies on this topic are based only on examining the relationship between FII investments in cash market and any associated effects on stock market returns while ignoring the FII activity in equity derivative markets. The impact of FIIs’ investments on Indian markets is re-examined in this paper by considering FII activity in Nifty index futures that trade on National Stock Exchange of India (NSE) and Singapore Exchange (SGX). The results show that Nifty index returns are statistically influenced by FII investments in Nifty index futures. Further, Nifty index returns effect the FIIs’ investments in Nifty index futures. Prima facie there is evidence of positive feedback trading behavior of FIIs. Hence, FIIs’ index futures activity could be used to predict the Nifty returns. There is a contemporaneous relationship between FIIs investments in cash and index futures market. SGX futures are not found to be influencing Nifty but Nifty is a significant explanatory variable in SGX futures returns.

INSTITUTIONAL TRADING AND OPENING PRICE BEHAVIOR: EVIDENCE FROM A FAST-EMERGING MARKET

Using daily and intraday data, we investigate the cross-sectional relation between stock prices and institutional trading in the Taiwan stock market. Consistent with the investigative herding hypothesis, we find that institutional herding exists because of institutional positive feedback trading behavior rather than following trades made by other institutions, as suggested by the information cascade hypothesis. Moreover, the positive correlation between institutional trade imbalance and stock returns mainly comes from institutional positive feedback trading. The institutional trading decisions rely on returns measured not only over the lagged trading day but also over the opening session during the same day.

Incentive to manipulate earnings and its connection to analysts’ forecasts, trading, and corporate governance

We develop a model where insiders’ decision to manipulate earnings is linked both to their stake and to corporate governance. We show how earnings manipulation affects analysts’ forecasts and institutional trading. More precisely, whenever there is “excessive” earnings manipulation, we observe less optimistic analysts. Furthermore, institutions exhibit positive feedback trading behavior and appear to “front-run” analysts’ errors. Finally, companies with strong corporate governance are less prone to these phenomena, being able to avoid the detrimental effects of insiders’ incentives. We then provide strong empirical evidence to support our model.

Can margin traders predict future stock returns in Japan?

A growing body of literature suggests that investor sentiment affects stock prices both at the firm level and at the market level. This study examines the relationship between investor behavior and stock returns focusing on Japanese margin transactions using weekly data from 1994 to 2003. Margin trading is dominated by individual investors in Japan. In analysis at the firm level, we find a significant cross-sectional relationship between margin buying and stock returns. Both market-level and firm-level analyses show that margin buying traders follow herding behavior. They seem to follow positive feedback trading behavior for small-firm stocks and negative feedback trading behavior for large firm stocks. Our results show that information about margin buying helps predict future stock returns, especially for small-firm stocks at short horizons. The predictive power does not diminish even after controlling for firm size and liquidity.

Noise trading and autocorrelation interactions in the foreign exchange market: Evidence from developed and emerging economies

This paper seeks to empirically determine whether feedback trading strategies result in stabilization or destabilization in the foreign exchange market and if such strategies are a distinctive characteristic of an emerging economy or they are a common element to both developed and emerging economies. These hypotheses are tested via the use of a feedback model augmented with a generalized autoregressive conditional heteroskedasticity (GARCH) process for modeling the errors. The results suggest presence of both positive and negative feedback trading and asymmetric behavior in both types of economies. Irrespective of the nature of feedback trading, presence of asymmetric behavior implies that market traders rely on central banks to intervene so they can realize short-term profits. Finally, in cases of a positive first-order autoregressive parameter presence of the bandwagon effect is implied, whereby past currency movements are followed by expectations of currency movements in the same direction.

Ownership Structure and Analysts' Forecasts

In this paper, we develop a model of earnings management that sheds light onto empirical regularities in the behavior of institutions and insiders. We link the earnings management decision to insiders' stake and show how this may impact analysts' forecast accuracy and institutional trading. More precisely, whenever there is excessive earnings management we observe less optimistic analysts. Furthermore, institutional investors exhibit positive feedback trading behavior and appear to front-run these analysts' forecast errors. We then construct a data set to test the empirical implications of our model. Among our implications, positive feedback trading behavior has already been documented in previous empirical studies. The others are empirically verified here for the first time.

Stock Returns and Volatility under Market Segmentation: The Case of Chinese A and B Shares

In most countries where firms list separate shares for trading by foreign and domestic investors, the prices of the foreign shares tend to be higher. In China, the reverse tends to be true. In this paper, we would like to focus on the information content in lagged premiums of Chinese A over B traded shares. The lagged premiums are found to have certain predictive power over the future returns and volatility of both A and B shares, with some interesting patterns. Specifically, an increase in the premium ratio of A shares will be followed by a rise in the return of A shares and a fall in the return of B shares. It is found that both of the investors in Chinese A- and B-share markets reveal positive feedback trading behavior. Moreover, the liquidity and information availability will affect the magnitude of such behavior especially in B-share markets. By using multivariate GARCH model, it is also demonstrated that the unexpected changes in the premium ratio of A-share price over B-share price contribute to the return volatility of both A shares and B shares. These patterns may provide foundations for the development of pricing models for equity shares under market segmentation.

Did the Asian Financial Crisis Scare Foreign Investors Out of Japan?

Foreigners became net sellers of Japanese equities during the Asian financial crisis in 1997. In this study, I examine whether this shift in aggregate foreign portfolio investment activity in Japan exacerbated the effect of the crisis on markets, or whether it simply reflected positive feedback trading behavior. The data draws from weekly reports to the Tokyo Stock Exchange of aggregate purchases and sales of Japanese equities by foreigners and local institutional and individual investors. I find evidence of consistent positive-feedback trading before and during the Asian crisis among foreign investors, while Japanese banks, financial institutions, investment trusts and companies were aggressive contrarian investors. There is no evidence that this trading activity by foreigners destabilized the markets during the crisis.