On the positive feedback trading Behavior - Positive feedback trading theory and the abnormal fluctuations in securities prices

Paper Keywords: positive and negative security price DSSW debt transactions
Abstract: The main review of the role of positive feedback trading theory, psychological basis, mechanism, model, and with the relationship between stock price changes, the study of China's recent stock price changes and market risk management guidance.

Positive feedback trading is when investors buy securities prices, and lead to further price increases; and sell securities when prices fall and cause a further drop in prices, the stock prices of the last serious deviation from its fundamental value, there systemic risk. In recent years, with the rapid development of behavioral finance, positive feedback trading behavior is raised various concerns.

First, the role of positive feedback trading theory
Positive feedback (Positive Feedback) from the systems engineering concept, it refers to the existence of information in a feedback system, the system again as the output of the input parameters of the system, further strengthening the system output. The system of self-enhancement, autocatalytic, self-organization process is a positive feedback, is to promote the causes of evolution of things. from simple systems to complex systems, there is positive feedback at work. the self-reinforcing effect of positive feedback, the system is often sensitive to the initial state or its closely related, and occasionally the little things and the results of the evolutionary process will have a significant impact.

Positive feedback to the evolution of the system's performance in the economic system becomes more apparent. In the financial markets, especially stock market, stock prices are subject to historical prices, prices, by themselves lead to more buying, and lead to further price up; and a drop in prices to sell more of their lead and lead prices fall further, so that traders buy when prices rise, prices fall to sell. For the positive feedback traders, the trading strategy is not the focus of is the fundamental value of securities, but rather the history of securities prices.

Since the existence of positive feedback trading securities increased unilateral movements, and often lead to the evolution of stock prices show a kind of internal dynamic positive feedback mechanism, excessive rise or fall, a serious departure from its intrinsic value. Therefore, positive feedback trading and financial bubble, financial crisis are closely linked. Because of this, positive feedback trading on stock prices due to unusual fluctuations has become to academics, the investment Research area of ​​the hot issues
Second, psychology is the basis of feedback trading
Behavioral finance that the stock market, the existence of positive feedback trading is due to investors due to the irrational psychology (Kahneman and Tversky, 1973,1979,1982; Russell and Thaler, 1985. French psychologist Lepang made in the 19th century a very famous "psychological group as a whole mental retardation" theorem, that the psychological community has impulsive, subject to such characteristics as sex and extreme, which led to his behavior is extremely irrational and highly volatile. The discovery of the securities for the later Positive feedback trading market to provide a psychological basis. a lot of psychological Research found that the human brain is not a good intuition statistical processor, the psychological conditions may distort the reasoning process, and often result in some unconscious bias that "heuristic bias."
There is a psychological heuristic as investors bias their investment will inevitably lead to irrational behavior (Kahneman and Trvesky, 1979). Such irrational behavior can be divided into two areas to one for the individual investor that the mental performance of overconfidence. De Bondt and Thaler (1985) that overconfidence is perhaps the most stable human psychological characteristics. Moreover, since the self-reinforcing attribution bias (Self a confident Biased Self an attribution), it often good results due to their ability, and the results will be poor due to external factors. shows that rational people can not continue the learning process to correct their beliefs, and ultimately lead to sustained over-confident. investors determine if their overconfidence, or rely exclusively on the historical experience of the past as a reference for judge, there may be insufficient response to the market in the emerging new trends and changes in response to slow, the loss of earnings a good time. and inadequate response to the contrary, over- reaction is not present the facts need to take some action, investors judge the subjective error has occurred that the facts and take action to occur investment mistakes. Second, to investor groups, the irrational behavior of investors in the stock market to form a herd behavior, investors in the transaction process to observe and imitate other people's transactions, resulting in a certain period of time similar to stock trading.

Third, the positive feedback trading behavior of the formation mechanism
At present, the formation mechanism of positive feedback trading behavior Research has focused on the mining generates positive feedback trading factors. Scharf-stern, and Stein (1990) that the herd behavior of investors led to the formation of positive feedback trading mechanism that blindly follow the trend of the herd behavior led directly to the positive feedback trading securities investment. As often abandon their herding behavior private information and follow the actions of others, and herd behavior has a certain convergence, therefore, when many investors trading at the same time, the same stocks, the stock's excess demand (or excess supply) will cause the stock supply and demand curve upward (or downward) sloping, resulting in significant changes in individual stock prices, the final destruction of the stable operation of the market. If the herd behavior exceeds a certain limit, will be evoked visions of another important market - over-reaction to appear. Embodied in rising markets (such as the bull market), the blind chasing the basis of the value of the stock price far exceeded the limits, leading to market bubbles; the decline in the market (such as the bear market), blind sell into the stock price much lower than the limits of fundamental value, deepening market crisis. transmission of information from the market perspective, the occurrence of herd behavior as the basis for all the information is incomplete. Therefore, once the market status changes of information, such as the arrival of new information, sheep behavior will collapse. This means that herd behavior is unstable and vulnerability. It is because of herd behavior have this feature, there is also a direct result of its financial market instability and vulnerability.

Koutmos (1997) that the formation mechanism of positive feedback trading extrapolation from investors. People in decision-making under uncertainty in the extrapolation used in a common prediction is that positive feedback trading. Andreassen and Kraus (1990 ) by very convincing experiments show that investors chase trends generally have (or not to buy up or buy) the tendency. Case and Shiller (1990) conducted a very famous survey found that the real estate market Investors showed a significant positive feedback trading. Frankel and Froot (1988) study shows that even if investors realize that the price may reverse the long term, but they are still in the short term trading strategy to chase trends.

Ritter (1993) that lead to the formation of positive feedback trading mechanism is the magic has long been regarded as a short-term investors, technical chart analysis. From the Charles H. Dow, etc. (1884) started to compile "average price", thus laying the cornerstone of technical analysis since the technical analysis has become one of the bases of many investors. And behavioral finance view, technical chart analysis assumes that "securities follow the evolution of trends in price changes and the formation of "fully explain the existence of the stock market is a positive feedback trading in the market. in the technical school representatives-John J. Murphy (1984) think of as" the evolution of prices to trend way, history will again "mindset, stock market fully reflects the presence of CKS feedback trading mechanism. see, believe in technical analysis theory," when prices break through a barrier into a rising trend level, or immediately after buying, and when prices fell below a support level or immediately after the formation of a downward trend in selling "trading strategy, is a typical positive feedback trading strategy.

Fourth, positive feedback trading model
Establishment of positive feedback trading model is the positive feedback trading behavior of the core. De Long, Shliefer, Summers, and Waldmann (1990) made a seminal article in the work. They proposed using the stock market to positive feedback trading explain the behavior of noise traders, and construct an asset pricing model, is referred to as the four-stage DSSW model. In this model, investors are divided into positive feedback traders, rational speculative traders and passive traders and investors assumed that the latter two and constant number of those who described the changes in stock prices in different periods (period 0, period 1, period 2, period 3) transactions of those types of transactions. each rational investors are negative feedback traders and trading thereof expectations based on their investment decision, in which rational investors expected returns on assets in the long run is unbiased; and positive feedback traders expected return on assets by its emotional impact, which has a systematic bias, the performance a clear "chase sell" behavior. As DSSW explained by positive feedback trading strategy formation mechanism of the market bubble, that investors focus too much history of price changes, to take non-rational positive feedback trading strategy, resulting in positive feedback market bubble Therefore, DSSW the stock market bubble from the point of actually providing a positive feedback trading model. Shleifer (2000) Positive feedback trading in the investment strategy of the model when you add a rational arbitrageurs who found that the volatility of stock price greater. domestic scholars VIBRATION AND SHOCK Yangchun Peng (2005) by extending the DSSW model, the introduction of noise traders overreact factor analysis found that under certain market conditions, the proportion of noise traders influence the size of non-rational bubbles; Zhang Xiaorong, Tang Guoxing , Xu Jiangang (2005) to positive feedback trading at the core, presents a mix of rational speculative bubble model. Links to Research Papers Download http://www.hi138.com five positive feedback trading behavior and stock price fluctuations in the relationship between abnormal
Of positive feedback trading and stock price anomalies Fluctuation Research has focused on institutional investor behavior and stock price changes in terms of relevance. Nofdinger and Sais (1999) found that individual investors than institutional investors with a greater degree of positive feedback trading strategy. Sentana and Wadhwani (1992) on the U.S. stock market in October 1987 for each transaction data and 1885-1988 when daily trading data on the positive feedback trading for observation found that, in the case of small fluctuations in stock prices, stock returns is positive autocorrelation in the short term, but in the case of large fluctuations, the performance of negative autocorrelation, the greater the volatility, the performance of the more obvious. Koutmos (1997) of 6 major industrialized countries (Australia, Belgium , Germany, Italy, Japan and the United Kingdom) stock market studies have shown that for short-term stock returns, the impact of positive feedback trading behavior is an important factor in stock returns. positive feedback trading that stock returns show a negative first order autocorrelation, and with the level of stock volatility to increase and more obvious. In addition, he also found that the volatility of earnings there is a degree of asymmetry, in which the four markets is positive feedback trading in the market dropped even more during the performance of intense, which in the U.S. stock market with their Research on very similar. Koutmos} Saidi (2001) for some emerging capital markets (Hong Kong, Malaysia, Philippines, Singapore, Taiwan and Thailand), the empirical results of the study, Toshiaki (2002) on Japanese stock market empirical results support this view.

Tang China scholars or, Zeng Yong, TANG Xiao-I (2002) study of positive feedback trading rules and the Shanghai Composite Index on the link between income from related, suggesting that positive feedback trading will result in a negative return autocorrelation, and correlation coefficient absolute value increases with volatility. LUO Ying, He Xiaofeng (2005) study finds that, due to positive feedback trading mechanism allows the amplification effect of a serious deviation from the stock price and value, resulting in securities prices are unstable. Xia Xinping and Wang Yi Xia (2003), Guo Lei, WU Chong (2004), King of the United States today (2005), respectively, from the performance of new shares, institutional investor behavior and investors in areas such as the disposition effect and found that institutional investors positive feedback traders in the face when the ride is not arbitrage but the advantage of the opportunity, thus exacerbating the stock market price volatility.

VI, Conclusions and Implications
The efficient market hypothesis as the representative of the modern classical financial theory that since the stock market, investors are rational and timely information changes will be reflected in stock prices, therefore, the stock price should eventually fluctuate around its intrinsic value (Fama, Eu-gene, 1965,1970). However, the American scholar Shiner (2002) empirical research has found that since 1925, U.S. stock prices and their speed is not consistent earnings growth, stock price volatility than solely by the actual determine the intrinsic value of the stock is much more volatile, particularly after 1994, the stock price is soaring, much higher than the intrinsic value. In fact, this finding was confirmed earlier by other scholars (De Bondt and Thaler, 1985 , 1987; Jegadeesh and Titman, 1993), and even representatives of the classical financial theory Fama (1998) has to admit that the performance of securities markets in some situations the "over-reaction", while in other situations has shown "response insufficient. "So, in addition to the basis of the value of the stock price changes, there are factors which lead to volatility in the stock price so it? modern classical financial theory can not make a satisfactory explanation for this.

With the exception of behavioral finance on the stock market to tap the phenomenon, researchers on the stock price volatility of the abnormal phenomenon in depth, we found that the classical theory of "rational man" supposed to have been no reasonable explanation of stock market, investor psychology and behavior. in the stock market there is a special kind of dealer - positive feedback traders (Positive Feedback Traders), they are not on the basis of the value of the securities and trading their own private information, and in full accordance with the short-term price performance of securities transactions , that is, buying securities when the stock price rises, but stock prices fall in sell securities. It is because of positive feedback traders adhere to the "chase sell" trading strategy, play the stock market "fueled the help or" the driving force that led to the stock price volatility is too intense.

Young's stock market in China, whether individual investors or institutional investors have a very significant positive feedback trading behavior. This not only greatly enhanced the frequency of abnormal fluctuations in market prices and the extent, but is also reflected in the process of rise and fall in price CKS feedback intensity asymmetry, namely, positive feedback trading by the reaction of securities prices rise more than prices of securities are more sensitive to the resulting decline in the market, the positive feedback trading when the market rises than violent, that there is significant leverage effect: bad news on the impact of falling stock prices good news for stock prices than to stimulate more greater.

China's securities market to maintain healthy development, protect investors, enhance regulatory efficiency of stock market transactions on the positive feedback mechanism and the occurrence of unusual fluctuations in stock prices due to, for the healthy development of China's stock market has a very important theoretical and practical significance. Links http://www.hi138.com Research Papers Download