Evidence of feedback trading with Markov switching regimes

Evidence of feedback trading with Markov switching regimes Previous research has concluded that the degree of return autocorrelation observed in index returns varies linearly with the volatility of the series, and that feedback traders are at least partly responsible for this phenomenon. Using daily Australian bond and equity market returns, we test this conclusion directly by using a Markov switching model for changing variance that explicitly allows the autocorrelation of returns to vary with the volatility regime. We find evidence that a significant proportion of investors in both the Australian equity and bond markets are positive feedback traders and are responsible for the observed increase in negative autocorrelation in index returns during periods of high and increasing volatility. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Evidence of feedback trading with Markov switching regimes

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Publisher
Springer US
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-007-0047-6
Publisher site
See Article on Publisher Site

Abstract

Previous research has concluded that the degree of return autocorrelation observed in index returns varies linearly with the volatility of the series, and that feedback traders are at least partly responsible for this phenomenon. Using daily Australian bond and equity market returns, we test this conclusion directly by using a Markov switching model for changing variance that explicitly allows the autocorrelation of returns to vary with the volatility regime. We find evidence that a significant proportion of investors in both the Australian equity and bond markets are positive feedback traders and are responsible for the observed increase in negative autocorrelation in index returns during periods of high and increasing volatility.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Sep 26, 2007

References

  • On the relation between the expected value and the volatility of the nominal excess returns on stocks
    Glosten, LR; Jagannathan, R; Runkle, DE
  • Modelling the conditional distribution of interest rates as a regime-switching process
    Gray, SF

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