Empirical Evidence on Feedback Trading in Mature and Emerging Stock Markets

We investigate the hypothesis that some participants in mature and emerging capital markets engage in feedback trading. The analysis is based on the Shiller-Sentana-Wadhwani noise trader model. It has the attractive property that it yields testable implications about the presence of positive and negative feedback traders in stock markets. This theoretical framework, together with an asymmetric GARCH-type model, allows us to draw conclusions about whether differences exist between mature and emerging capital markets in terms of the degree of feedback trading. The empirical results show that positive and negative feedback trading strategies exist in both types of markets but are more pronounced in emerging stock markets than in their mature counterparts. Hence, non-fundamental trading strategies seems to play a more important role in emerging relative to mature stock markets.