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Testing for Long Memory in the Feedback Mechanism in the Futures Markets

Testing for Long Memory in the Feedback Mechanism in the Futures Markets This paper investigates the possibility that futures markets attract noise traders who engage in positive feedback trading, an especially destabilizing form of noise trading. The hypothesis is tested using data from four major national index futures markets. The empirical evidence is consistent across all index futures markets under examination. Specifically, there is significant evidence of positive feedback trading. More importantly, the feedback trading pattern exhibits significant long memory in the sense that it depends on longer lags of past prices. Because volatility is asymmetric, the implication is that feedback trading is also asymmetric, being more prevalent during down markets so that mispricing is more likely during those periods that feedback traders are more active. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Behavioral Finance Emerald Publishing

Testing for Long Memory in the Feedback Mechanism in the Futures Markets

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References (23)

Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1940-5979
DOI
10.1108/19405979201100004
Publisher site
See Article on Publisher Site

Abstract

This paper investigates the possibility that futures markets attract noise traders who engage in positive feedback trading, an especially destabilizing form of noise trading. The hypothesis is tested using data from four major national index futures markets. The empirical evidence is consistent across all index futures markets under examination. Specifically, there is significant evidence of positive feedback trading. More importantly, the feedback trading pattern exhibits significant long memory in the sense that it depends on longer lags of past prices. Because volatility is asymmetric, the implication is that feedback trading is also asymmetric, being more prevalent during down markets so that mispricing is more likely during those periods that feedback traders are more active.

Journal

Review of Behavioral Finance – Emerald Publishing

Published: Sep 21, 2011

Keywords: Feedback trading; Index futures; Feedback persistence

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