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Naïve Style-Level Feedback Trading in Passive Funds

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  • Broman, Markus S.

Abstract

Passive exchange-traded funds (ETFs) are ideally suited to style-level feedback trading because of their high liquidity, ease of short selling, and pure play on investment styles. I find strong evidence of short-term style-momentum trading in ETFs. Institutional investors that use ETFs do not act as arbitrageurs by trading against style momentum. Institutions, especially less sophisticated ones, are themselves style-momentum traders. Moreover, recent style-level demand predicts style-level return reversals. These findings suggest that uninformed positive feedback trading by less sophisticated market participants can destabilize financial markets in the short run.

Suggested Citation

  • Broman, Markus S., 2022. "Naïve Style-Level Feedback Trading in Passive Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 57(3), pages 1083-1114, May.
    • Handle: RePEc:cup:jfinqa:v:57:y:2022:i:3:p:1083-1114_9
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