Feedback Trading and Autocorrelation Pattern of Sub-Saharan African Equity Markets

Abstract

Speculators constantly search for mispriced securities, with many studying past prices to identify patterns, known as feedback trading. Positive feedback trading perpetuates a trend and is thus destabilising, as it drives prices away from their fundamental value and contributes to volatility. In contrast, negative feedback trading, trading in the opposite direction of the trend, is stabilising, as it drives prices back to their fundamental value. This study examined whether individual shares on the South African market are prone to feedback trading strategies; the results of which have importance for regulators and policymakers, arbitrageurs and portfolio managers. On average, 23% of the shares showed evidence of feedback trading, with approximately 9% of this being positive feedback trading and 14% negative feedback trading. The implications of these findings for various market participants are discussed.