Style-Level Feedback Trading and Noise Trader Demand

71 Pages Posted: 3 Jun 2017 Last revised: 30 Aug 2018

See all articles by Markus S. Broman

Markus S. Broman

Syracuse University - Whitman School of Management

Date Written: August 19, 2018


Exchange-Traded Funds (ETFs) represent pure plays investment styles. This makes them ideally suited to style switchers that allocate more (less) money to styles that have recently performed well (poorly) in the cross-section. I show that aggregate ETF demand shocks (net fund flows) display strong evidence of style momentum trading, but only up to a quarterly horizon. For institutional ETF demand, the evidence is particularly strong among short-term investors. Alternative explanations based on institutional style-level herding do not explain the results. Style-level demand for ETFs has a positive and significant price impact, but the effect is reversed over the following six months. A trading strategy that bets against aggregate ETF demand, or institutional ETF demand, yields significant abnormal returns. These findings suggest that noise-trader demand for investment styles sometimes pushes prices away from fundamentals.

Keywords: Fund flows, Noise Trader Demand, Style Investing, ETF, Institutional Trading, Arbitrage, Return Predictability.

JEL Classification: G10, G11, G14, G23

Suggested Citation

Broman, Markus S., Style-Level Feedback Trading and Noise Trader Demand (August 19, 2018). Available at SSRN: or

Markus S. Broman (Contact Author)

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States


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