Investor Sentiment, Trading Behavior and Informational Efficiency in Index Futures Markets


  • I thank Arabinda Basistha, Alexei Egorov, Grigori Erenburg, Arnie Cowan (the editor) and two anonymous referees for helpful comments and suggestions. I am also grateful to the staff of the Commodity Futures Trading Commission (CFTC) and the American Association of Individual Investors (AAII) for providing data. This work was supported by a summer research grant from the College of Business and Economics, West Virginia University.

* Corresponding author: College of Business and Economics, West Virginia University, 1601 University Ave., Morgantown, WV 26506-6025; Phone: (304) 293-7892; E-mail:


This paper shows that traders in index futures markets are positive feedback traders—they buy when prices increase and sell when prices decline. Positive feedback trading appears to be more active in periods of high investor sentiment. This finding is consistent with the notion that feedback trading is driven by expectations of noise traders. Consistent with the noise trading hypothesis, order flow in index futures markets is less informative when investors are optimistic. Transitory volatility measured at high frequencies also appears to decline in periods of bullish sentiment, suggesting that sentiment-driven trading increases market liquidity.