Momentum Trading: Evidence from Futures Markets
20 Pages Posted: 7 Aug 2008
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.
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