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

Warren G. Dean, Robert Faff*

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

3 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)1665-1678
Number of pages14
JournalApplied Financial Economics
Volume21
Issue number22
DOIs
Publication statusPublished - Nov 2011
Externally publishedYes

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