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The investor behavior and futures market volatility: A theory and empirical study based on the OLG model and high-frequency data

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Author Info

  • Yun Wang
  • Renhai Hua
  • Zongcheng Zhang
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    Abstract

    Purpose–The purpose of this paper is to examine whether the futures volatility could affect the investor behavior and what trading strategy different investors could adopt when they meet different information conditions. Design/methodology/approach–This study introduces a two-period overlapping generation model (OLG) model into the future market and set the investor behavior model based on the future contract price, which can also be extended to complete and incomplete information. It provides the equilibrium solution and uses cuprum tick data in SHFE to conduct the empirical analysis. Findings–The two-period OLG model based on the future market is consistent with the practical situation; second, the sufficient information investors such as institutional adopt reversal trading patterns generally; last, the insufficient information investors such as individual investors adopt momentum trading patterns in general. Research limitations/implications–Investor trading behavior is always an important issue in the behavioral finance and market supervision, but the related research is scarce. Practical implications–The conclusion shows that the investors' behavior in Chinese future market is different from the Chinese stock market. Originality/value–This study empirically analyzes and verifies the different types of trading strategies investors could; investors such as institutional ones adopt reversal trading patterns generally; while investors such as individual investors adopt momentum trading patterns in general.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=2044-1398&volume=1&issue=4&articleid=1950964&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal China Finance Review International.

    Volume (Year): 1 (2011)
    Issue (Month): 4 (August)
    Pages: 388-407

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    Handle: RePEc:eme:cfripp:v:1:y:2011:i:4:p:388-407

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: China; Futures markets; Investor behaviour; Investors; Momentum trading; Overlapping generation model; Reversal trading;

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    References

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    1. Spiegel, Matthew, 1998. "Stock Price Volatility in a Multiple Security Overlapping Generations Model," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 419-47.
    2. De Long, J Bradford, et al, 1989. " The Size and Incidence of the Losses from Noise Trading," Journal of Finance, American Finance Association, vol. 44(3), pages 681-96, July.
    3. Lovric, M. & Kaymak, U. & Spronk, J., 2008. "A Conceptual Model of Investor Behavior," ERIM Report Series Research in Management ERS-2008-030-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    4. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
    5. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    6. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory And Asset Prices," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 1-53, February.
    7. Wang, Jiang, 1993. "A Model of Intertemporal Asset Prices under Asymmetric Information," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 249-82, April.
    8. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
    9. Masahiro Watanabe, 2008. "Price Volatility and Investor Behavior in an Overlapping Generations Model with Information Asymmetry," Journal of Finance, American Finance Association, vol. 63(1), pages 229-272, 02.
    10. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-68, February.
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