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Investor Sentiment, Trading Behavior and Informational Efficiency in Index Futures Markets

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  • Alexander Kurov

Abstract

This paper shows that traders in index futures markets are positive feedback traders-they buy when prices increase and sell when prices decline. Positive feedback trading appears to be more active in periods of high investor sentiment. This finding is consistent with the notion that feedback trading is driven by expectations of noise traders. Consistent with the noise trading hypothesis, order flow in index futures markets is less informative when investors are optimistic. Transitory volatility measured at high frequencies also appears to decline in periods of bullish sentiment, suggesting that sentiment-driven trading increases market liquidity. Copyright 2008, The Eastern Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6288.2007.00188.x
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Bibliographic Info

Article provided by Eastern Finance Association in its journal Financial Review.

Volume (Year): 43 (2008)
Issue (Month): 1 (02)
Pages: 107-127

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Handle: RePEc:bla:finrev:v:43:y:2008:i:1:p:107-127

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Web page: http://www.easternfinance.org/
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Cited by:
  1. Salm, Christian A. & Schuppli, Michael, 2010. "Positive feedback trading in stock index futures: International evidence," International Review of Financial Analysis, Elsevier, vol. 19(5), pages 313-322, December.
  2. Cathy Chen & I-Doun Kuo, 2014. "Investor sentiment and interest rate volatility smile: evidence from Eurodollar options markets," Review of Quantitative Finance and Accounting, Springer, vol. 43(2), pages 367-391, August.
  3. Chia-Hao Lee & Pei-I Chou, 2012. "Trading Activity and Financial Market Integration," The Financial Review, Eastern Finance Association, vol. 47(3), pages 589-616, 08.
  4. Koutmos, Dimitrios, 2012. "An intertemporal capital asset pricing model with heterogeneous expectations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1176-1187.

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