The Existence and Impact of Destabilizing Positive Feedback Traders: Evidence from the S&P 500 Index Futures Market

Abstract

Positive feedback investment is a speculative trading strategy in which individuals buy after price increases and sell after price declines. Theoretical models of this trading strategy have shown that prices can be destabilized. I examine individual accounts in the S&P 500 Index futures contract to detect positive feedback trading. A significant minority of active accounts perform positive feedback strategies more frequently than can be explained by chance. After periods of concentrated positive feedback trading, however, prices do not reverse as theory predicts. Test results of the relation between positive feedback volume and volatility are mixed: positive feedback volume and volatility are positively associated using two different techniques, but not a third technique.

JEL Classification: G13, G18