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Investor Sentiment, Trading Behavior and Informational Efficiency in Index Futures Markets
Author(s) -
Kurov Alexander
Publication year - 2008
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2007.00188.x
Subject(s) - futures contract , market liquidity , index (typography) , volatility (finance) , economics , financial economics , futures market , high frequency trading , order (exchange) , open outcry , trading strategy , algorithmic trading , pairs trade , market sentiment , monetary economics , alternative trading system , finance , world wide web , computer science
This paper shows that traders in index futures markets are positive feedback traders—they buy when prices increase and sell when prices decline. Positive feedback trading appears to be more active in periods of high investor sentiment. This finding is consistent with the notion that feedback trading is driven by expectations of noise traders. Consistent with the noise trading hypothesis, order flow in index futures markets is less informative when investors are optimistic. Transitory volatility measured at high frequencies also appears to decline in periods of bullish sentiment, suggesting that sentiment‐driven trading increases market liquidity.