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Index futures and positive feedback trading: Evidence from major stock exchanges

Antoniou, A.; Koutmos, G.; Pericli, A.

Authors

A. Antoniou

G. Koutmos

A. Pericli



Abstract

This paper tests the hypothesis that the introduction of index futures has increased positive feedback trading in the spot markets of six industrialized nations. The analysis is based on a model that assumes two different groups of investors, i.e., risk averse expected utility maximizing investors and positive feedback traders. There is evidence consistent with positive feedback trading before the introduction of index futures across all markets under investigation. In the period following the introduction of index futures, there is no evidence supporting the hypothesis that positive feedback trading drives short-term dynamics of stock returns. The possibility that this is due to possible migration of feedback traders from the spot to the futures markets is also tested. The results show no evidence of positive feedback trading in the futures markets. Overall, the findings support the view that futures markets help stabilize the underlying spot markets by reducing the impact of feedback traders and thus attracting more rational investors who make the markets more informationally efficient and thus providing investors with superior ways of managing risk.

Citation

Antoniou, A., Koutmos, G., & Pericli, A. (2005). Index futures and positive feedback trading: Evidence from major stock exchanges. Journal of Empirical Finance, 12(2), 219-238. https://doi.org/10.1016/j.jempfin.2003.11.003

Journal Article Type Article
Publication Date Mar 1, 2005
Deposit Date Feb 20, 2009
Journal Journal of Empirical Finance
Print ISSN 0927-5398
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 12
Issue 2
Pages 219-238
DOI https://doi.org/10.1016/j.jempfin.2003.11.003
Keywords Stock index futures, Feedback trading, Efficiency.
Public URL https://durham-repository.worktribe.com/output/1601022