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Positive feedback trading, institutional investors and securities price fluctuation

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  • Yin Hong

Abstract

Purpose - The purpose of this paper is to research and analyze the influence of institutional investors in the present securities market due to behavior alienation with “running after rising and falling” and “herd behavior”. Design/methodology/approach - A DeLong, Shleifer, Summers, and Waldmann (DSSW) model with positive feedback trading is established first to show the trading process, and these securities prices are calculated considering the investors' emotion. Through numerical analysis, the influence of institutional investors on securities price fluctuation is simulated. Further, the analysis of institutional investors' incomes is processed based on this model. Findings - Through these analyses, the following conclusions are drawn: it lies on the scale of positive feedback traders and their sensitivity to past market performances whether the institutional investors can stabilize the market, and it is not necessary for the institutional investors to benefit from manipulating the market due to the existence of noise trader risk, so the positive feedback traders may survive in the security market over the long term. Originality/value - The DSSW model considering positive feedback trading, presented in the paper, is more effective in analyzing the relation among the behavior of institutional investors, securities pricing and securities price fluctuation. The paper proposes some advice for policy decisions, which is helpful for government and institutions to maintain the stability of securities markets.

Suggested Citation

  • Yin Hong, 2011. "Positive feedback trading, institutional investors and securities price fluctuation," China Finance Review International, Emerald Group Publishing Limited, vol. 1(2), pages 120-132, January.
    • Handle: RePEc:eme:cfripp:v:1:y:2011:i:2:p:120-132
    DOI: 10.1108/20441391111100714
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    References listed on IDEAS

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    1. De Long, J Bradford, et al, 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    2. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
    3. Kim Sosin & Janet Rives & Janet West, 1998. "Unions and Gender Pay Equity in Academe: A Study of U.S. Institutions," Feminist Economics, Taylor & Francis Journals, vol. 4(2), pages 25-45.
    4. Francis X. Diebold & Kamil Yılmaz, 2007. "Macroeconomic Volatility and Stock Market Volatility,World-Wide," Koç University-TUSIAD Economic Research Forum Working Papers 0711, Koc University-TUSIAD Economic Research Forum.
    5. James A. Bennett, 2003. "Greener Pastures and the Impact of Dynamic Institutional Preferences," The Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1203-1238.
    6. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
    7. Richard W. Sias, 2007. "Reconcilable Differences: Momentum Trading by Institutions," The Financial Review, Eastern Finance Association, vol. 42(1), pages 1-22, February.
    8. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 2006. "Feedback and the success of irrational investors," Journal of Financial Economics, Elsevier, vol. 81(2), pages 311-338, August.
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