Style-Level Feedback Trading and Noise Trader Demand

71 Pages Posted: 3 Jun 2017 Last revised: 12 Mar 2019

See all articles by Markus S. Broman

Markus S. Broman

Syracuse University - Whitman School of Management

Date Written: February 28, 2019


Exchange-Traded Funds (ETFs) represent pure plays investment styles. This makes them ideally suited to style switchers that naively allocate more (less) money to styles that have recently performed well (poorly) in the cross-section. I show that net ETF flows exhibit strong evidence of style momentum trading up to a quarterly horizon. Among institutional investors, style momentum trading is particularly strong among previously poorly performing, low active share and short-term investors. Alternative explanations based on institutional style-level herding do not explain the results. Style-level demand for ETFs predicts style-level return reversals. A trading strategy that bets against recent style-level 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 (February 28, 2019). 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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