Positive feedback trading, institutional investors and securities price fluctuation

Yin Hong (Business School, East China Normal University, Shanghai, People's Republic of China)

China Finance Review International

ISSN: 2044-1398

Publication date: 28 January 2011

Abstract

Purpose

The purpose of this paper is to research and analyze the influence of institutional investors in the present securities market due to behavior alienation with “running after rising and falling” and “herd behavior”.

Design/methodology/approach

A DeLong, Shleifer, Summers, and Waldmann (DSSW) model with positive feedback trading is established first to show the trading process, and these securities prices are calculated considering the investors' emotion. Through numerical analysis, the influence of institutional investors on securities price fluctuation is simulated. Further, the analysis of institutional investors' incomes is processed based on this model.

Findings

Through these analyses, the following conclusions are drawn: it lies on the scale of positive feedback traders and their sensitivity to past market performances whether the institutional investors can stabilize the market, and it is not necessary for the institutional investors to benefit from manipulating the market due to the existence of noise trader risk, so the positive feedback traders may survive in the security market over the long term.

Originality/value

The DSSW model considering positive feedback trading, presented in the paper, is more effective in analyzing the relation among the behavior of institutional investors, securities pricing and securities price fluctuation. The paper proposes some advice for policy decisions, which is helpful for government and institutions to maintain the stability of securities markets.

Keywords

Citation

Hong, Y. (2011), "Positive feedback trading, institutional investors and securities price fluctuation", China Finance Review International, Vol. 1 No. 2, pp. 120-132. https://doi.org/10.1108/20441391111100714

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

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