Positive Feedback Trading and Stock Return Autocorrelation: The Case of Morocco

This paper investigates the presence of positive feedback trading in the Casablanca stock exchange and measures the profitability and the effectiveness of selected herding strategies. The MADEX returns from 2004 to 2010 are analyzed, modeled, and forecasted for that purpose using linear autoregressive models, GARCH processes, and E-GARCH processes. Relying on the Sentana and Wadhwani’s positivefeedback model, this paper explores the link between feedback trading, serialautocorrelations, and volatility. It presents supporting evidence on the persistence of serial autocorrelations in the index returns suggesting the prevailing influence of feedback trading activity on return dynamics. The signaling-based simulation results reveal that herd trading dominates the simple buy and hold strategy and the smart money investors’strategy both on daily and weekly bases. The results also unveil the impact of the day of trade on weekly trading outcomes, volatilities, and Sharpe ratios