Evidence of feedback trading with Markov switching regimes

Warren G. Dean, Robert W. Faff*

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

16 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)133-151
Number of pages19
JournalReview of Quantitative Finance and Accounting
Volume30
Issue number2
DOIs
Publication statusPublished - Feb 2008
Externally publishedYes

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