Naïve Style-level Feedback Trading in Passive Funds

66 Pages Posted: 3 Jun 2017 Last revised: 29 May 2020

See all articles by Markus S. Broman

Markus S. Broman

Syracuse University - Whitman School of Management

Date Written: December 1, 2016

Abstract

Passive ETFs are ideally suited for style-level feedback trading because of their high liquidity, ease of short-selling and pure play on investment styles. I find strong evidence of short-term style momentum trading in ETFs. Institutional investors that use ETFs do not act as arbitrageurs by trading against style momentum. Institutions, especially the less sophisticated ones, are style momentum traders themselves. Recent style-level demand predicts style-level return reversals. These findings suggest that naïve positive feedback trading, especially by institutions, can destabilize financial markets in the short run.

Keywords: Positive feedback trading, institutional trading, non-fundamental demand, exchange-traded fund, return predictability.

JEL Classification: G10, G11, G14, G23

Suggested Citation

Broman, Markus S., Naïve Style-level Feedback Trading in Passive Funds (December 1, 2016). Available at SSRN: https://ssrn.com/abstract=2979043 or http://dx.doi.org/10.2139/ssrn.2979043

Markus S. Broman (Contact Author)

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

HOME PAGE: http://www.markusbroman.com

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
94
Abstract Views
740
rank
295,376
PlumX Metrics