Feedback Traders and Stock Return Autocorrelations: Evidence from a Century of Daily Data

The authors investigate whether the degree of autocorrelation shown by high frequency stock returns changes with volatility. This may result from nontrading effects, feedback trading strategies, or variable risk aversion. The authors' results indicate that when volatility is low, daily (and hourly) stock returns exhibit positive autocorrelation, but when it is high, returns exhibit negative serial correlation. They also find an important asymmetry--negative serial correlation is more likely after price declines. This is consistent with price declines being more likely to induce positive feedback trading. The authors also find no significant relation between margin requirements and the autocorrelation of returns. Copyright 1992 by Royal Economic Society.