Business cycle variation in positive feedback trading Evidence from the G-7 economies.pdf.pdf

Int. Fin. Markets, Inst. and Money 35 (2015) 147–159

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Journal of International Financial

Markets, Institutions & Money

journal homepage: ate/intfin

Business cycle variation in positive feedback trading:

Evidence from the G-7 economies
∗


Frankie Chau , Rataporn Deesomsak

Durham University Business School, United Kingdom

a r t i c l e i n f o a b s t r a c t


Article history: Using the business cycle indicators and the aggregate stock market data, this paper exa-

Received 18 November 2013

mines the degree of positive feedback trading in the G-7 economies and the extent to which

Accepted 12 December 2014

such behaviour varies across business cycle. The evidence suggests that there is a significant

Available online 22 December 2014

positive feedback trading in the major stock exchanges of G-7 countries and its intensity is

linked to the overall macroeconomic conditions. Specifically, our investigation reveals that
JEL classification:

in expansions there is more active positive feedback trading than in recessions. Overall, our
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results yield an important insight into the effect of business cycle on investors’ behaviour
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and market dynamics and bear important implications for the investment professions and
Keywords: market regulators.


Business cycle © 2014 Elsevier . All rights reserved.
Feedback trading
G-7 economies
1. Introduction
1

It is well known that stock return displays time-varying serial correlation. However, less is known about the dynamics

and economic sources of its variations. Starting with the seminal work of Fama (1971), a large number of studies have

analysed this issue using a wide range of variables and techniques (see, ., Lo and MacKinlay, 1990; McKenzie and Faff,

2003, 2005). In spite of the growing research, empirical evidence suggests that fundamental factors such as tim