Feedback trading and the behavioural ICAPM: multivariate evidence across international equity and bond markets

Warren Dean and Robert Faff

Applied Financial Economics, 2011, vol. 21, issue 22, 1665-1678

Abstract: In this article we develop a 'behavioural' Intertemporal Capital Asset Pricing Model (ICAPM) in which the behavioural impetus comes from the feedback trading implications for the autocorrelation of returns. We apply the model in a setting of paired equity and bond investments, employing a bivariate diagonal Berndt-Engle-Kraft-Kroner (BEKK) framework. Our empirics rely on daily equity and bond index returns across six major economies, over the period 1 January 1990 to 30 June 2005. We find evidence supporting the theory that the observed dynamics of serial correlation can be a function of both volatility and conditional covariance (between equity and bonds). Moreover, our behavioural ICAPM shows empirical promise as a useful model of asset pricing in markets that display the feedback trading phenomenon.

Keywords: feedback trading; autocorrelated returns; behavioural ICAPM; GARCH-M; equity and bond markets; international evidence (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1080/09603107.2011.591728

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