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The literature on positive feedback trading has grown considerably in recent years. The purpose of this paper is to provide a review of the theoretical and empirical literature on positive feedback trading and especially the literature related to the Sentana and Wadhwani (1992) model.

This literature review covers theoretical and empirical work in this area and it points out shortcomings and potential extensions of the basic feedback model.

The evidence so far points in the direction of positive feedback trading being present in aggregate stock market indices, index futures, bond markets, foreign exchange markets and individual stocks. There are some important issues that require further investigation. For example, it is likely that feedback trading is a function of longer lags of past return. Likewise, asymmetric behavior during up and down markets appears to be the rule rather than the exception. More importantly, the models should allow for positive as well as negative feedback and be general enough to investigate feedback trading behavior in individual assets and not just the aggregate market.

The discussion points out theoretical and empirical limitations and shortcomings of the extant literature.

This is the first paper to review positive feedback trading, implications, limitations and need for future research.

Purpose – The aggregate investment by foreign institutional investors (FIIs) in the Indian stock market is significant compared to that by domestic institutions and individual (retail) investors. The question of whether FIIs exhibit herding and positive feedback trading while investing in the Indian stock markets has not been examined so far. This study is an attempt to fill the gap and contribute to the existing evidence on foreign portfolio investment in India.

Methodology/approach – We have analyzed the daily data on purchases and sales of securities by FIIs sourced from the Securities and Exchange Board of India (SEBI), and the Bombay Stock Exchange (BSE). We have adopted the approach of Lakonishok et al. (1992), and Wermers (1999) to examine herding and positive feedback trading by foreign investors.

Findings – Our results suggest that FIIs exhibit herding and positive feedback trading during different phases of the stock market. This observed behavior is prominent in but not restricted to large cap stocks as they enjoy better liquidity.

Social implication – The herding and positive feedback trading by FIIs is a cause for concern for government of India, capital market regulator (SEBI), and the country's central bank (RBI) as it adversely affects stock prices and volatility. They are required to formulate and implement a suitable policy response given their objective of protecting the interests of small investors in the market. They may also have to monitor the purchases and sales of equities by FIIs in general and of better performing large cap stocks in particular.

Motivated by the unique characteristics and profit generating nature of real estate investments, this paper aims to study if investors herd differently in corresponding securities versus other non‐real estate securities.

The authors choose the Hong Kong stock market to form the sample to distinguish the herd behavior of the property stocks, if any, from stocks of other categories. The authors separate stocks into two portfolios, those made up of property stocks versus non‐property stocks, because it is widely known that property stocks have high market volatility and domination of institutional investors.

The authors find a persistent and significant smaller herding in property stocks. The result of a reverse U‐shape intraday herding pattern also provides a possible clue to previous studies of a U‐shape in intraday volatility pattern. The authors document that recent announcements of an increase in the short‐term interest rate have an additive effect on the herd behavior of market participants in trading property stocks. Lastly, on the conjecture that herding will further exemplify price instability arising from positive feedback trading while investors engage in positive feedback trading in both property stocks and non‐property stocks, such activity in the latter group lasts for a longer period. Furthermore, price instability of property stocks disappears at a faster pace than the counterpart.

This study shows that property stocks are more efficiently traded by investors than other types of stocks, at least in the Hong Kong stock market.

The purpose of this paper is to examine the hypothesis of feedback trading along with the short-term return dynamics of three size-based stock portfolios of Athens Stock Exchange during the Greek debt crisis period.

To this end, the authors employ for the first time in the literature two well-known models while the variance equation is modeled by means of a multivariate EGARCH specification. As a robustness test an innovative nested-EGARCH model is also employed.

The assumption that positive feedback trading is an important component of the short-term return movements across the three stock portfolios receives significant support. Moreover, the volatility interdependence, both in magnitude and sign, is almost similar across the three models. Finally, bad news originating from the portfolio of small stock appears to have a higher impact on the volatility of large and medium size stock returns than good news during the Greek debt crisis period.

The methodology is innovative and the authors test for the first time the feedback trading hypothesis across different size stocks. The authors believe that the results might entail significant policy implications for investors and market regulators.

The purpose of this paper is to explain the theory of speculation to corporate executives. It is important that corporate hedgers understand how bubbles develop to effectively adjust their corporate hedging strategies. Since excess speculation is always the primary cause of all bubbles, it is mandatory that corporate executives understand the basics of speculation theory.

The paper uses the case of Southwest Airlines to illustrate how corporate hedging programs can fail in an environment of asset price bubbles. Further, it reviews key academic theoretical articles on speculation, with emphasis on applied concepts.

Corporate hedgers must recognize inflating bubbles and acknowledge the positive feedback trading. Corporate hedgers must refrain from becoming the positive feedback traders themselves. Corporate hedgers can hedge the speculative bubbles by having insurance in form of options against potential bubbles at all times.

The paper can be a valuable reference source for corporate managers with diverse educational and business backgrounds because it widely disseminates the theory that only the closed circle of the trading community and narrowly specialized researches practice and fully understand.

The purpose of this paper is to review the insights provided by behavioral finance studies conducted in the last decade (2006-2015) examining behavioral variables in financial decision making.

The literature review assesses 623 qualitative and quantitative studies published in various international refereed journals and identifies possible scope of future work.

The paper identifies stock market anomalies which contradict rational agents of modern portfolio theory at an aggregate level and behavioral mediators, influencing the financial decision making at an investor level. The paper also attempts to classify different dimensions of risk as professed by the investor.

The authors synthesize the contribution made by behavioral finance studies in extending the knowledge of financial market and investor behavior.

As of March 2021, the National Pension Service (NPS) is the world’s 3rd largest pension fund with 872.5tn won (KRW) in management. Recently, the NPS proposed a policy to gradually reduce the proportion of domestic stocks in the portfolio in the future. This change in the asset allocation strategy is related to the NPS’s exit strategy for domestic stocks. This study aims to examine the market impact cost asymmetry between buys and sells of the NPS and suggest a trading strategy for mitigating the market impact cost. The results are as follows. First, there is an asymmetry between buys and sells in the market impact cost of the NPS. The market impact cost of the NPS is gradually increasing over time. In particular, the market impact cost from selling has increased significantly in recent years. Second, past returns, volatility, liquidity and trading intensity can be found as external factors affecting the asymmetric market impact cost of the NPS. Although there is no difference between the buying and selling ratios of the NPS, the market impact cost from sells is relatively higher than that from buys. Third, after controlling for the order execution size of the NPS, the longer the trade execution period, the lower the market impact cost. This result implies that the strategy of splitting orders as a way to reduce the market impact cost is effective. The trading behavior of the NPS directly or indirectly affects other investors. If the sell of the NPS incurs excessive market impact cost, the negative impact on the stock price will be further exacerbated. Therefore, it is necessary for the NPS to reduce the market impact cost through split trading in executing orders in the domestic stock market. Findings of this study provide implications for countermeasures and long-term management strategies that can minimize the market impact cost of the NPS in the process of reducing the proportion of domestic stocks in the future.

While the classic futures pricing tool works well for capital markets that are less affected by sentiment, it needs further modification in China's case as retail investors constitute a large portion of the Chinese stock market participants. Their expectations of the rate of return are prone to emotional swings. This paper, therefore, explores the role of investor sentiment in explaining futures basis changes via the channel of implied discount rates.

Using Chinese equity market data from 2010 to 2019, the authors augment the cost-of-carry model for pricing stock index futures by incorporating the investor sentiment factor. This design allows us to estimate the basis in a better way that reflects the relationship between the underlying index price and its futures price.

The authors find strong evidence that the measure of Chinese investor sentiment drives the abnormal fluctuations in the basis of China's stock index futures. Moreover, this driving force turns out to be much less prominent for large-cap stocks, liquid contracting frequencies, regulatory loosening periods and mature markets, further verifying the sentiment argument for basis mispricing.

This study contributes to the literature by relying on investor sentiment measures to explain the persistent discount anomaly of index futures basis in China. This finding is of great importance for Chinese investors with the intention to implement arbitrage, hedging and speculation strategies.

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”.

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.

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.

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.

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.