Investor sentiment and feedback trading : Evidence from the exchange-traded fund markets

Frankie Chau, Rataporn Deesomsak, Marco C.K. Lau

    Research output: Contribution to journalArticlepeer-review

    32 Citations (Scopus)


    This paper extends the standard feedback trading model of Sentana and Wadhwani (1992) by allowing the demand for shares by feedback traders to depend on sentiment. Our empirical analysis of three largest Exchange-Traded Fund (ETF) contracts in the U.S. suggests that there is a significant positive feedback trading in these markets and the intensity of which is generally linked to investor sentiment. Specifically, the level of feedback trading tends to increase when investors are optimistic. In addition, we find that the influence of sentiment on feedback trading varies across market regimes. These results are consistent with the view that feedback trading activity is largely caused by the presence of sentiment-driven noise trading. Overall, the findings are important in understanding the role of sentiment in investment behaviour and market dynamics and are of direct relevance to the regulators and investors in ETF markets.

    Original languageEnglish
    Pages (from-to)292-305
    Number of pages14
    JournalInternational Review of Financial Analysis
    Issue number5
    Publication statusPublished - 12 Oct 2011

    Bibliographical note

    Copyright 2012 Elsevier B.V., All rights reserved.


    Dive into the research topics of 'Investor sentiment and feedback trading : Evidence from the exchange-traded fund markets'. Together they form a unique fingerprint.

    Cite this