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Testing for Long Memory in the Feedback Mechanism in the Futures Markets

Antonios Antoniou (Financial Research, Training & Consulting, Canterbury, UK)
Gregory Koutmos (Fairfield University, Dolan School of Business, Fairfield, CT 06430, USA)
Gioia Pescetto (Canterbury Christ Church University, Northwood Court Hall Millennium Way, Broadstairs, Kent CT10 2LA, UK)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 21 September 2011



This paper investigates the possibility that futures markets attract noise traders who engage in positive feedback trading, an especially destabilizing form of noise trading. The hypothesis is tested using data from four major national index futures markets. The empirical evidence is consistent across all index futures markets under examination. Specifically, there is significant evidence of positive feedback trading. More importantly, the feedback trading pattern exhibits significant long memory in the sense that it depends on longer lags of past prices. Because volatility is asymmetric, the implication is that feedback trading is also asymmetric, being more prevalent during down markets so that mispricing is more likely during those periods that feedback traders are more active.



Antoniou, A., Koutmos, G. and Pescetto, G. (2011), "Testing for Long Memory in the Feedback Mechanism in the Futures Markets", Review of Behavioral Finance, Vol. 3 No. 2, pp. 78-90.



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Copyright © 2011, Emerald Group Publishing Limited

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