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Investor sentiment and feedback trading: Evidence from the exchange-traded fund markets

Author

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  • Chau, Frankie
  • Deesomsak, Rataporn
  • Lau, Marco C.K.

Abstract

This paper extends the standard feedback trading model of Sentana and Wadhwani (1992) by allowing the demand for shares by feedback traders to depend on sentiment. Our empirical analysis of three largest Exchange-Traded Fund (ETF) contracts in the U.S. suggests that there is a significant positive feedback trading in these markets and the intensity of which is generally linked to investor sentiment. Specifically, the level of feedback trading tends to increase when investors are optimistic. In addition, we find that the influence of sentiment on feedback trading varies across market regimes. These results are consistent with the view that feedback trading activity is largely caused by the presence of sentiment-driven noise trading. Overall, the findings are important in understanding the role of sentiment in investment behaviour and market dynamics and are of direct relevance to the regulators and investors in ETF markets.

Suggested Citation

  • Chau, Frankie & Deesomsak, Rataporn & Lau, Marco C.K., 2011. "Investor sentiment and feedback trading: Evidence from the exchange-traded fund markets," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 292-305.
  • Handle: RePEc:eee:finana:v:20:y:2011:i:5:p:292-305 DOI: 10.1016/j.irfa.2011.06.006
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    Cited by:

    1. Yung-Ching Tseng & Wo-Chiang Lee, 2016. "Investor Sentiment and ETF Liquidity - Evidence from Asia Markets," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 6(1), pages 1-5.
    2. Gavriilidis, Konstantinos & Kallinterakis, Vasileios & Tsalavoutas, Ioannis, 2016. "Investor mood, herding and the Ramadan effect," Journal of Economic Behavior & Organization, Elsevier, pages 23-38.
    3. ap Gwilym, O. & Kita, A. & Wang, Q., 2014. "Speculate against speculative demand," International Review of Financial Analysis, Elsevier, pages 212-221.
    4. Emilios C. Galariotis & Phil Holmes & Vasileios Kallinterakis & Xiaodong S. Ma, 2014. "Market states, expectations, sentiment and momentum: How naive are investors?," Post-Print hal-00943345, HAL.
    5. repec:eee:riibaf:v:42:y:2017:i:c:p:1289-1297 is not listed on IDEAS
    6. Charteris, Ailie & Chau, Frankie & Gavriilidis, Konstantinos & Kallinterakis, Vasileios, 2014. "Premiums, discounts and feedback trading: Evidence from emerging markets' ETFs," International Review of Financial Analysis, Elsevier, pages 80-89.
    7. Chau, Frankie & Deesomsak, Rataporn, 2015. "Business cycle variation in positive feedback trading: Evidence from the G-7 economies," Journal of International Financial Markets, Institutions and Money, Elsevier, pages 147-159.
    8. Aloui, Chaker & Hkiri, Besma & Lau, Chi Keung Marco & Yarovaya, Larisa, 2016. "Investors’ sentiment and US Islamic and conventional indexes nexus: A time–frequency analysis," Finance Research Letters, Elsevier, pages 54-59.
    9. repec:eee:ecofin:v:42:y:2017:i:c:p:285-299 is not listed on IDEAS
    10. Gębka, Bartosz & Serwa, Dobromił, 2015. "The elusive nature of motives to trade: Evidence from international stock markets," International Review of Financial Analysis, Elsevier, pages 147-157.
    11. Jacoby, Gady & Liao, Rose C., 2012. "Price discovery and sentiment," International Review of Financial Analysis, Elsevier, pages 108-118.
    12. Chau, Frankie & Kuo, Jing-Ming & Shi, Yukun, 2015. "Arbitrage opportunities and feedback trading in emissions and energy markets," Journal of International Financial Markets, Institutions and Money, Elsevier, pages 130-147.

    More about this item

    Keywords

    Investor sentiment; Feedback trading; Exchange-traded fund;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G1 - Financial Economics - - General Financial Markets

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