Business cycle variation in positive feedback trading: Evidence from the G-7 economies

• We examine the presence of positive feedback trading strategy in the G7 stock markets and the extent to which such behaviour varies across business cycle.
• We find there exist significant trend-following strategies which are more pronounced during the expansionary phases of economy.
• This yields an important insight into the effect of macroeconomic conditions on investor behaviour and market dynamics.

Using the business cycle indicators and the aggregate stock market data, this paper examines the degree of positive feedback trading in the G-7 economies and the extent to which such behaviour varies across business cycle. The evidence suggests that there is a significant positive feedback trading in the major stock exchanges of G-7 countries and its intensity is linked to the overall macroeconomic conditions. Specifically, our investigation reveals that in expansions there is more active positive feedback trading than in recessions. Overall, our results yield an important insight into the effect of business cycle on investors’ behaviour and market dynamics and bear important implications for the investment professions and market regulators.