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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.

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  • Alexander Kurov, 2008. "Investor Sentiment, Trading Behavior and Informational Efficiency in Index Futures Markets," The Financial Review, Eastern Finance Association, vol. 43(1), pages 107-127, February.
  • Handle: RePEc:bla:finrev:v:43:y:2008:i:1:p:107-127
    DOI: 10.1111/j.1540-6288.2007.00188.x
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