Fotini Economou, Konstantinos Gavriilidis, Bartosz Gebka and Vasileios Kallinterakis
The purpose of this paper is to comprehensively review a large and heterogeneous body of academic literature on investors' feedback trading, one of the most popular trading…
Abstract
Purpose
The purpose of this paper is to comprehensively review a large and heterogeneous body of academic literature on investors' feedback trading, one of the most popular trading patterns observed historically in financial markets. Specifically, the authors aim to synthesize the diverse theoretical approaches to feedback trading in order to provide a detailed discussion of its various determinants, and to systematically review the empirical literature across various asset classes to gauge whether their feedback trading entails discernible patterns and the determinants that motivate them.
Design/methodology/approach
Given the high degree of heterogeneity of both theoretical and empirical approaches, the authors adopt a semi-systematic type of approach to review the feedback trading literature, inspired by the RAMESES protocol for meta-narrative reviews. The final sample consists of 243 papers covering diverse asset classes, investor types and geographies.
Findings
The authors find feedback trading to be very widely observed over time and across markets internationally. Institutional investors engage in feedback trading in a herd-like manner, and most noticeably in small domestic stocks and emerging markets. Regulatory changes and financial crises affect the intensity of their feedback trades. Retail investors are mostly contrarian and underperform their institutional counterparts, while the latter's trades can be often motivated by market sentiment.
Originality/value
The authors provide a detailed overview of various possible theoretical determinants, both behavioural and non-behavioural, of feedback trading, as well as a comprehensive overview and synthesis of the empirical literature. The authors also propose a series of possible directions for future research.
Details
Keywords
Frankie Chau, Galiya B. Dosmukhambetova and Vasileios Kallinterakis
The purpose of this paper is to examine whether the mandatory adoption of International Financial Reporting Standards (IFRS) has produced an impact on the level of noise trading…
Abstract
Purpose
The purpose of this paper is to examine whether the mandatory adoption of International Financial Reporting Standards (IFRS) has produced an impact on the level of noise trading and volatility dynamics in three major central and eastern European (CEE) markets.
Design/methodology/approach
The paper employs the theoretical framework proposed by Sentana and Wadhwani to allow the existence of both rational investors and trend‐chasing traders in examining the extent to which mandatory IFRS adoption affects the level of noise trading and volatility in the market place.
Findings
The results show that noise trading was mostly significant prior to the IFRS introduction, with its significance dissipating following the implementation. Moreover, the paper finds that the level and persistence of stock return volatility has greatly decreased after the implementation of IFRS.
Research limitations/implications
These findings are important in understanding the effect of IFRS adoption on the information environment and market dynamics and bear some important implications for the corporate managers, accounting professions and policy makers. For instance, the documented dissipation in noise trading post‐IFRS implies that the activity in the sample markets is dominated by rational fundamental investors for whom financial reports constitute part of their decision‐making input. Thus, it is crucial that the enforcement of IFRS constitutes a key priority of local authorities as a contributing factor to the efficiency and transparency of the market environment.
Practical implications
The finding that moving towards the international accounting standards helps to improve the quality and stability of financial markets should provide a useful reference for many other countries which have recently introduced and/or been considering switching to IFRS as their mandatory accounting standards.
Originality/value
This paper provides the first investigation of the effect of accounting standards’ harmonization upon the level of noise trading and volatility of three major transition markets (the Czech Republic, Hungary, and Poland) in the CEE area.
Details
Keywords
Panagiotis Andrikopoulos, Andreas Albin Hoefer and Vasileios Kallinterakis
The purpose of this paper is to present and empirically test for the first time the hypothesis that herding in a market increases following the market's merger in an exchange…
Abstract
Purpose
The purpose of this paper is to present and empirically test for the first time the hypothesis that herding in a market increases following the market's merger in an exchange group.
Design/methodology/approach
The hypothesis is tested empirically in EURONEXT's four European equity markets (Belgium, France, the Netherlands and Portugal) on the premise of the Hwang and Salmon (2004) measure which allows us insight into the significance, structure and evolution of market herding. Tests are conducted for each market for the period prior to and after its merger into EURONEXT, controlling for a series of variables (market conditions, common risk factors, size) to gauge the robustness of the findings.
Findings
Results indicate that, with the exception of Portugal, herding grows in significance, yet declines in momentum post-merger. The authors ascribe the findings to EURONEXT's enhanced transparency (which makes it easier for investors to observe their peers’ trades, thus allowing them to infer and free-ride on their information) and its fast-moving informational dynamics that render herding movements shorter-lived. These results are robust when controlling for various market states and common risk factors, with deviations being observed when controlling for size and market volatility.
Originality/value
The study presents results for the first time on the impact of exchange mergers on herd behavior. The authors believe these to constitute useful stimulus for further research on the issue and bear important implications for regulators/policymakers in view of the ongoing proliferation of exchange mergers that has been underway since the 1990s.