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Positive feedback trading: evidence from futures markets

Author

Listed:
  • Antonios Antoniou
  • Gregory Koutmos
  • Gioia Pescetto

Abstract

Shiller (1990) hypothesises that the positive feedback mechanism in financial markets may exhibit longer memory in the sense that feedback may operate over long time intervals. This paper tests the Shiller hypothesis using data from major index futures markets. The analysis is based on a modified dynamic capital asset pricing model that assumes two types of investors: 1) expected utility maximisers; 2) positive feedback traders who sell during market declines and buy during market advances. According to the model, the interaction of the two groups induces negative time varying autocorrelation. There is some evidence of time-varying negative autocorrelation, consistent with the notion that some participants engage in positive feedback trading. Moreover, the feedback mechanism exhibits persistence in support of Shiller's (1990) hypothesis.

Suggested Citation

  • Antonios Antoniou & Gregory Koutmos & Gioia Pescetto, 2011. "Positive feedback trading: evidence from futures markets," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 13(1), pages 13-25.
    • Handle: RePEc:ids:gbusec:v:13:y:2011:i:1:p:13-25
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    Citations

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    Cited by:

    1. Imran Riaz MALIK* & Attaullah SHAH*, 2014. "Market Varying Conditional Risk-Return Relationship," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 24(2), pages 121-142.
    2. Hou, Yang & Li, Steven, 2014. "The impact of the CSI 300 stock index futures: Positive feedback trading and autocorrelation of stock returns," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 319-337.
    3. Antonios Antoniou & Gregory Koutmos & Gioia Pescetto, 2011. "Testing for Long Memory in the Feedback Mechanism in the Futures Markets," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 3(2), pages 78-90, September.

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