Feedback trading and the autocorrelation pattern of stock returns: Further empirical evidence

This paper examines the pattern of autocorrelation of stock returns in several foreign stock markets, assuming that some investors follow a positive feedback trading strategy. There is strong evidence that positive feedback trading induces negative autocorrelation in index stock returns even though the consensus is that high frequency index returns are positively autocorrelated. This sign reversal occurs during periods of rising stock return volatility. The range of autocorrelations is considerably large. Moreover, in most cases, positive feedback trading is more intense during market declines. These findings are in agreement with studies for the US stock market. (C) 1997 Elsevier Science Ltd.