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Positive Feedback Trading and Investor Sentiment

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  • Zhi-Min Dai
  • De-Cheng Yang

Abstract

This article examines how investor sentiment affects positive feedback trading behavior. By analyzing the daily closing total return of CSI 300 index and its individual returns of stocks, we find that relatively high or low sentiment induces active positive feedback trading. With a specific indicator of sentiment, we explain the microstructure setting of the relationship between positive feedback trading and sentiment. We adopt the classical feedback model from Sentana and Wadhwani (1992) to measure positive feedback trading behavior. By adding sentiment factor to the model, we successfully explain how sentiment influences the behavior of both feedback traders and rational investors. The empirical findings suggest that positive feedback traders are more likely to trade when the prices of most securities move forward together. When the sentiment of feedback traders is at an intermediate level, the feedback trading behavior is insignificant.

Suggested Citation

  • Zhi-Min Dai & De-Cheng Yang, 2018. "Positive Feedback Trading and Investor Sentiment," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(10), pages 2400-2408, August.
    • Handle: RePEc:mes:emfitr:v:54:y:2018:i:10:p:2400-2408
    DOI: 10.1080/1540496X.2018.1469003
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    Cited by:

    1. Fotini Economou & Konstantinos Gavriilidis & Bartosz Gebka & Vasileios Kallinterakis, 2022. "Feedback trading: a review of theory and empirical evidence," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 15(4), pages 429-476, February.
    2. Nevi Danila & Bunyamin & Ahmad Djalaluddin & Yudha Fathony, 2023. "Do Foreign Fund Flows Influence the Stock Market Index? Evidence From Indonesia," SAGE Open, , vol. 13(4), pages 21582440231, October.
    3. Aihua Li, 2021. "Conditional Estimates of Diffusion Processes for Evaluating the Positive Feedback Trading," Papers 2111.12564, arXiv.org.

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