Feedback Trading and Its Implications for Return Autocorrelations in India During COVID

Abstract

In emerging capital markets, feedback trading is a widely pursued strategy by investors. Such behavior may potentially lead to volatility and cause negative autocorrelation in market returns, especially during high volatility. In India, such a linkage has not been explored so far, though institutional investors have pursued feedback trading for the last two decades. Also, COVID-19 has led to higher volatility in the markets and might have altered investors’ behavior. This article focuses on finding whether feedback trading is still pursued by institutional investors in Indian equity markets post-COVID and also whether the presence of feedback traders exerts any influence on autocorrelations in market returns. Asymmetric GARCH models are employed to explore the linkage. Findings suggest that while foreign institutional investors continue to pursue positive feedback trading, as in the pre-pandemic period, domestic investors pursue negative feedback trading. However, in the post-pandemic period, as other types of trading became weak or perished, positive feedback traders have started dominating, leading to negative autocorrelation in market returns during heightened volatility. Evidence of negative autocorrelation was not present in the pre-pandemic period. Further, negative news leads to more volatility in returns. JEL Codes: F21, F32, G11