Title: Positive feedback trading: evidence from futures markets

Authors: Antonios Antoniou, Gregory Koutmos, Gioia Pescetto

Addresses: Financial Research, Training and Consulting, Colepike Hall, Lanchester, Durham DH7, ORW, UK. ' Dolan School of Business, Fairfield University, Fairfield, CT 06430, USA. ' Dean of the Faculty of Business and Management, Canterbury Christ Church University, Northwood Court Hall Millennium Way, Broadstairs, Kent CT10 2LA, UK

Abstract: Shiller (1990) hypothesises that the positive feedback mechanism in financial markets may exhibit longer memory in the sense that feedback may operate over long time intervals. This paper tests the Shiller hypothesis using data from major index futures markets. The analysis is based on a modified dynamic capital asset pricing model that assumes two types of investors: 1) expected utility maximisers; 2) positive feedback traders who sell during market declines and buy during market advances. According to the model, the interaction of the two groups induces negative time varying autocorrelation. There is some evidence of time-varying negative autocorrelation, consistent with the notion that some participants engage in positive feedback trading. Moreover, the feedback mechanism exhibits persistence in support of Shiller|s (1990) hypothesis.

Keywords: feedback trading; index futures; feedback persistence; financial markets; dynamic capital asset pricing; Shiller; futures markets.

DOI: 10.1504/GBER.2011.039187

Global Business and Economics Review, 2011 Vol.13 No.1, pp.13 - 25

Available online: 25 Mar 2011 *

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