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

Frankie Chau, Rataporn Deesomsak, Chi Keung Lau

Research output: Contribution to journalArticlepeer-review

55 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
JournalInternational Review of Financial Analysis
Issue number5
Publication statusPublished - 2011


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