Testing for Feedback Trading in Index Futures: A Dynamic CAPM Approach

21 Pages Posted: 20 Jun 2002

See all articles by Gregory Koutmos

Gregory Koutmos

Fairfield University - Charles F. Dolan School of Business

Abstract

This paper tests the hypothesis that some participants in index futures markets engage in feedback trading. The analysis is based on a modified dynamic Capital Asset Pricing Model that assumes two types of investors: i) expected utility maximizers, and ii) positive feedback traders who sell during market declines and buy during market advances. According to the model, the actions of the latter group, if present, would induce negative time varying autocorrelation. The model is tested using data from four popular international stock index futures contracts. There is some evidence of time-varying negative autocorrelation, consistent with the notion that some participants are feedback traders. However, other important aspects of the model are not supported by the evidence.

Suggested Citation

Koutmos, Gregory, Testing for Feedback Trading in Index Futures: A Dynamic CAPM Approach. EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=314509 or http://dx.doi.org/10.2139/ssrn.314509

Gregory Koutmos (Contact Author)

Fairfield University - Charles F. Dolan School of Business ( email )

Dolan School of Business
N. Benson Road
Fairfield, CT 06824
United States
203-254-4000 Ext. 2832 (Phone)

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