Order Flows, Investor Sentiments and Feedback Trade in Index Futures Market
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Order Flows, Investor Sentiments and Feedback Trade in Index Futures Market Ameet Kumar Banerjee1 · H. K. Pradhan2
© The Indian Econometric Society 2020
Abstract This paper examines the presence of feedback trading, and investor sentiment drove feedback trading by traders in the Nifty 50 index futures contract in India. The results of the study using high-frequency data sampled at 10 min interval using VAR and contemporaneous VAR model as applied to market microstructure settings reveals negative evidence of feedback trade and investor sentiment-driven feedback trade in Nifty 50 futures contract. Further, consistency with noise trading hypothesis, order flows in Nifty 50 futures contract is less informative when traders are overly optimistic. Keywords Feedback trading · Investor sentiment · VAR · Market microstructure · Futures markets
Introduction Feedback trading is a trading strategy in which the market participants buy or sell futures contracts in response to an increase (decrease) of prices. Feedback trading is important to investors who use futures contracts for hedging risk or trade based on private information. The presence of feedback trading can be traced back to the work of Freidman (1953), who argued that speculators must stabilize asset prices and those who destabilize do so on average by buying when prices are high and selling when prices are low. Moreover, speculators, who make a positive profit they do so by trading against the less rational investors who move the prices away from their fundamentals.
* H. K. Pradhan [email protected] Ameet Kumar Banerjee [email protected] 1
Xavier Institute of Management, Xavier University, Bhubaneswar, Odisha 751 013, India
2
XLRI, Xavier School of Management, Jamshedpur, Jharkhand 831001, India
13
Vol.:(0123456789)
Journal of Quantitative Economics
In the early studies, most of the work on noise trading and market efficiency accepted the argument that risk-averse rational speculators keep away from taking large arbitrage positions so that noise traders can affect prices. However, De Long et al. (1990a) presented a contrarian argument that feedback trading by noise traders, along with the bandwagon of rational investors have a destabilizing effect on the markets, and have potency to drive the prices away from the fundamentals, causing mispricing to continue over more extended periods, impairing hedging or arbitrage activities. While Sentana and Wadhwani (1992) reported evidence of feedback trading in US stock markets, whereas studying six industrially developed markets, Koutmos (1997) found evidence of feedback trade in these markets. Antoniou et al. (2005) documented the presence of positive feedback trading in the index futures market and concluded that rational speculators trading in index futures might help stabilize the underlying stock prices. The present study adds to the evidence of feedback trading in an emerging and fast-growing stock index futures market like India, as past studies still offer mixed evidence in support of feedback tra
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