A Study On Positive Feedback Trading In A-share Market

Positive feedback traders are a special class of irrational traders in financial markets. They make investment decisions according to the last trading price change rather than the fundamental value of securities. They coexist with the rational traders in the long run and interact with them, which influences the formation process of asset prices and market stability.First, this paper clarifies the basic concepts and historical roots of feedback trading. Also, this paper conducts behavioral financial analysis on the psychological basis of feedback trading, considering the impact of cognitive biases and emotional bias. Then, this paper introduces the DSSW noise trading theory, which is the preludes and source of positive feedback trading theories. This paper also analyzes the effect of positive feedback trading on stock market volatility. Then, this paper compares and selects the main test methods of positive feedback trading, and constructs the EGARCH(1,1)-GED-based positive feedback trading model. After that, this paper uses the model to make an empirical test and analyze of the positive feedback trading of the main-board market, medium-small-board and second-board market of Chinese stock market; discussing the positive feedback trading behavior differences among various industry sectors of Chinese stock market and extending the study of the positive feedback trading to a more micro perspective. Finally, related suggestions are proposed.The results show that, there are significant positive feedback trading evidence in the main-board market, medium-small-board and second-board market of Chinese stock market. And positive feedback trading in medium-small-board and second-board market is stronger than the main-board market, in other word, medium-small-board and second-board stock market is more prone to positive feedback traders than the main-board stock market. In the other hand, there are significant asymmetry in the positive feedback trading behavior in the main-board market, medium-small-board and second-board market of Chinese stock market, and positive feedback trading effect is much stronger during the market decline than the market increasing. Once the market declines, the positive feedback traders will have significant effects on market pricing. The call behavior have more significant effects than put behavior, and that make the stock market more unstable.Meanwhile, we discuss the feedback trading behavior differences among various industry sectors of Chinese stock market and find that there are significant difference between them. The volatility have impact on the feedback trading of energy, health care, consumer staples and telecom services sectors. Moreover, there are significant asymmetry in the positive feedback trading behavior, and positive feedback trading effect is much stronger during the market decline than the market increasing. But the other six industry sectors have no significant time-varying feedback trading effects.