Feedback trading: a review of theory and empirical evidence

Abstract

PurposeThe purpose of this paper is to comprehensively review a large and heterogeneous body of academic literature on investors' feedback trading, one of the most popular trading patterns observed historically in financial markets. Specifically, the authors aim to synthesize the diverse theoretical approaches to feedback trading in order to provide a detailed discussion of its various determinants, and to systematically review the empirical literature across various asset classes to gauge whether their feedback trading entails discernible patterns and the determinants that motivate them.Design/methodology/approachGiven the high degree of heterogeneity of both theoretical and empirical approaches, the authors adopt a semi-systematic type of approach to review the feedback trading literature, inspired by the RAMESES protocol for meta-narrative reviews. The final sample consists of 243 papers covering diverse asset classes, investor types and geographies.FindingsThe authors find feedback trading to be very widely observed over time and across markets internationally. Institutional investors engage in feedback trading in a herd-like manner, and most noticeably in small domestic stocks and emerging markets. Regulatory changes and financial crises affect the intensity of their feedback trades. Retail investors are mostly contrarian and underperform their institutional counterparts, while the latter's trades can be often motivated by market sentiment.Originality/valueThe authors provide a detailed overview of various possible theoretical determinants, both behavioural and non-behavioural, of feedback trading, as well as a comprehensive overview and synthesis of the empirical literature. The authors also propose a series of possible directions for future research.

Feedback Trading and Its Implications for Return Autocorrelations in India During COVID

“…Thus, the interaction between rational and feedback traders is likely to produce first-order autocorrelation in market returns, as the present return exhibits some relation to past returns due to the presence of feedback traders. Feedback trading is observed across all asset classes, types of investors, and markets over time (Economou et al, 2022). However, institutional investors are found to engage in feedback trading markedly in domestic stocks with small capitalizations and more prominently in emerging or frontier markets.…”

“…Feedback trading is observed across all asset classes, types of investors, and markets over time (Economou et al, 2022). However, institutional investors are found to engage in feedback trading markedly in domestic stocks with small capitalizations and more prominently in emerging or frontier markets.…”

Feedback trading in the cryptocurrency market

“…Behavioral finance theorists define feedback trading as trading on historical movements in prices (Economou et al , 2022; Conrad et al , 1994; Wang et al , 2022). For instance, positive feedback trading, also known as trend-chasing, occurs when investors sell (or buy) financial instruments as a reaction to historical prices going down (or up), resulting in positive return autocorrelation (De Long et al , 1990; Wang et al , 2022).…”

Modelo de análisis multivariante aplicado a la predicción de la tendencia del tipo de cambio euro-dólar

“…Este tipo de operativa, además de aprovechar la tendencia de los precios, impulsa a otros analistas a realizar las mismas operaciones en busca de resultados similares, lo que produce el efecto rebaño [218]. En términos generales, la negociación a través de ciclos de retroalimentación positiva (negativa) consiste en ejecutar operaciones de compra (venta) del activo negociado cuando el valor del activo se aprecia y se vende (compra) cuando el valor del activo se deprecia [219].…”