Feedback Trading and International Portfolio Allocation

34 Pages Posted: 11 Jun 2012 Last revised: 18 Oct 2012

See all articles by Jyri Kinnunen

Jyri Kinnunen

Swedish School of Economics and Business Administration

Date Written: October 18, 2012

Abstract

This paper explores the effect of feedback trading on expected returns and international portfolio allocation using stock market data for the US and Latin America. Autocorrelation in monthly returns are shown to vary with volatility as suggested by the Shiller-Sentana-Wadhwani feedback trading model. While the feedback model fits the data considerably better than a conditional version of the zero-beta CAPM, differences between the feedback model and alternative models with a first-order autoregressive term are more modest. Global factors have no explanatory power for expected returns in addition to the feedback model. Investors can improve their portfolio optimization between developed and emerging stock markets by taking feedback trading into consideration.

Keywords: asset pricing, international finance, portfolio management

JEL Classification: G11, G12, G15

Suggested Citation

Kinnunen, Jyri, Feedback Trading and International Portfolio Allocation (October 18, 2012). Paris December 2012 Finance Meeting EUROFIDAI-AFFI Paper, Available at SSRN: https://ssrn.com/abstract=2081578 or http://dx.doi.org/10.2139/ssrn.2081578

Jyri Kinnunen (Contact Author)

Swedish School of Economics and Business Administration ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland

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