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Feedback trading and the behavioural ICAPM: multivariate evidence across international equity and bond markets

  • Warren Dean
  • Robert Faff

In this article we develop a 'behavioural' Intertemporal Capital Asset Pricing Model (ICAPM) in which the behavioural impetus comes from the feedback trading implications for the autocorrelation of returns. We apply the model in a setting of paired equity and bond investments, employing a bivariate diagonal Berndt-Engle-Kraft-Kroner (BEKK) framework. Our empirics rely on daily equity and bond index returns across six major economies, over the period 1 January 1990 to 30 June 2005. We find evidence supporting the theory that the observed dynamics of serial correlation can be a function of both volatility and conditional covariance (between equity and bonds). Moreover, our behavioural ICAPM shows empirical promise as a useful model of asset pricing in markets that display the feedback trading phenomenon.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09603107.2011.591728
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Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 21 (2011)
Issue (Month): 22 ()
Pages: 1665-1678

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Handle: RePEc:taf:apfiec:v:21:y:2011:i:22:p:1665-1678
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