Investor Sentiment and Feedback Trading: Evidence from the Exchange-Traded Fund Markets

Chau, F.; Deesomsak, R.; Lau, M.

doi:10.1016/j.irfa.2011.06.006

Investor Sentiment and Feedback Trading: Evidence from the Exchange-Traded Fund Markets

Chau, F.; Deesomsak, R.; Lau, M.

Authors

Dr Frankie Chau h.c.f.chau@durham.ac.uk
Associate Professor

Dr Rataporn Deesomsak rataporn.deesomsak@durham.ac.uk
Associate Professor

M. Lau

Abstract

This paper extends the standard feedback trading model of Sentana and Wadhwani (1992) by allowing the demand for shares by feedback traders to depend on sentiment. Our empirical analysis of three largest Exchange-Traded Fund (ETF) contracts in the U.S. suggests that there is a significant positive feedback trading in these markets and the intensity of which is generally linked to investor sentiment. Specifically, the level of feedback trading tends to increase when investors are optimistic. In addition, we find that the influence of sentiment on feedback trading varies across market regimes. These results are consistent with the view that feedback trading activity is largely caused by the presence of sentiment-driven noise trading. Overall, the findings are important in understanding the role of sentiment in investment behaviour and market dynamics and are of direct relevance to the regulators and investors in ETF markets.

Citation

Chau, F., Deesomsak, R., & Lau, M. (2011). Investor Sentiment and Feedback Trading: Evidence from the Exchange-Traded Fund Markets. International Review of Financial Analysis, 20(5), 292-305. https://doi.org/10.1016/j.irfa.2011.06.006

Journal Article Type	Article
Publication Date	Oct 1, 2011
Deposit Date	Jul 18, 2011
Publicly Available Date	Mar 4, 2015
Journal	International Review of Financial Analysis
Print ISSN	1057-5219
Publisher	Elsevier
Peer Reviewed	Peer Reviewed
Volume	20
Issue	5
Pages	292-305
DOI	https://doi.org/10.1016/j.irfa.2011.06.006
Keywords	Investor sentiment, Feedback trading, Exchange-traded fund.
Public URL	https://durham-repository.worktribe.com/output/1529683
Publisher URL	http://dx.doi/org/10.1016/j.irfa.2011.06.006

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Copyright Statement
NOTICE: this is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis, 20, 5, October 2011, 10.1016/j.irfa.2011.06.006.