Financial Research Journal

Financial Research Journal

Analysis of Feedback Trading in Exchange-traded Funds with an Emphasis on Price Premiums and Discounts in the Tehran Stock Exchange

Document Type : Research Paper

Authors
Meysam Kaviani 1
Seyed Fakhreddin Fakhrehosseini 2
Masumeh Jafari 3
1 Assistant Prof., Department of Finance, Faculty of Management and Accounting, Karaj Branch, Islamic Azad University, Karaj, Iran.
2 Associate Prof., Department of Finance, Faculty of Management and Accounting, Karaj Branch, Islamic Azad University, Karaj, Iran
3 MSc., Department of Finance Management, Faculty of Management and Accounting, Karaj Branch, Islamic Azad University, Karaj, Iran
10.22059/frj.2025.390336.1007715
Abstract
Objective
The main objective of this study is to analyze feedback trading behavior in exchange-traded funds (ETFs) on the Tehran Stock Exchange, with a particular focus on the effects of price deviations, including premiums and discounts. The study investigates how investors respond to deviations between fund unit prices and net asset values (NAV) and how these deviations contribute to the formation of positive and negative feedback trading behaviors. Furthermore, it explores the extent to which price deviations influence investors’ trading decisions and contribute to market price fluctuations. Accordingly, the study examines the relationship between investors’ responses to different price conditions, return variations, and feedback trading behavior.

Methods
This study is of an applied type and aims to solve practical problems in the capital market that can impact the decision-making of investors and financial analysts. In terms of methodology, this research is descriptive-correlational and examines the relationships between the variables. The statistical population of this study includes all stock funds traded on the Tehran Stock Exchange from 2014 to 2024. After selecting 13 funds with superior performance during this period, the daily data were collected. The required data were obtained from the Iranian FIP site (Fipiran.com), a reliable source for statistical analysis and information on the Iranian capital market. The models employed in this study are based on the framework proposed by Sentana and Wadhwani (1992), which distinguishes between two types of traders: rational speculators and feedback traders. This framework examines the impact of price deviations on investor behavior. Additionally, the Ljung–Box test (1978) was applied to analyze autocorrelations and lag effects in fund returns. Furthermore, the model developed by Chou, Deesomsak, and Lau (2011), which provides an empirical extension of the Sentana and Wadhwani framework, was employed to investigate the effects of price premiums and discounts on feedback trading behavior in ETFs (exchange-traded funds).

Results
The results show that price deviations significanly effect ETF trading behavior. When ETFs trade at a price premium, meaning that the market price of fund units is higher than their net asset value (NAV), positive feedback trading behavior is observed. This situation increases investors’ willingness to buy and prices. In other words, when the price of the fund exceeds the NAV, investors are more inclined to buy, and as a result, prices increase. This situation creates arbitrage opportunities and enhances positive market fluctuations. In contrast, in the case of a price discount, where the price of the fund is lower than the NAV, negative feedback transactions are observed. In this case, investors are more inclined to sell funds, and their confidence in the intrinsic value of the funds decreases. This reaction leads to a decrease in prices and an increase in negative fluctuations. Overall, the results indicate a significant effect of price Discount and premium on the intensity of feedback behaviors in the market. In addition, the GARCH model shows that the volatility of fund returns significantly depends on price deviations and market conditions.

Conclusion
This study demonstrates that feedback trading behavior in ETFs is influenced by price premiums and discounts. A price premium increases investors’ willingness to buy, whereas a price discount increases their willingness to sell. These results indicate the significant role of price deviation from intrinsic value in the formation of investors' feedback behaviors. These findings suggest that investment fund managers adopt strategies to control price deviations and reduce severe market fluctuations. Additionally, the use of risk management mechanisms and increased information transparency can help improve fund performance and strengthen investor confidence.
Keywords
Discount
Feedback trading
Exchange-Traded Funds (ETFs)
Premium
Subjects
References
Abreu, D. & Brunnermeier, M. (2003). Bubbles and crashes. Econometrica, 71(1), 173–204.
Badenhorst, W. M. (2017). Premiums and discounts of exchanged-traded funds. South African Journal of Accounting Research, 31(3), 212-222.
Barnhart, S. W. & Rosenstein, S. (2010). Exchange‐traded fund introductions and closed‐end fund discounts and volume. Financial Review, 45(4), 973-994.
Brunnermeier, M. & Pedersen, L. (2005). Predatory trading. Journal of Finance, 60, 1825–1863.
Charteris, A. & Kallinterakis, V. (2021). Feedback trading in retail-dominated assets: Evidence from the gold bullion coin market. International Review of Financial Analysis, 75, 101727.
Charteris, A., Chau, F., Gavriilidis, K. & Kallinterakis, V. (2014). Premiums, discounts and feedback trading: evidence from emerging markets' ETFs. International Review of Financial Analysis, 35, 80-89.‏
Chau, F., Deesomsak, R. & Lau, M. C. (2011). Investor sentiment and feedback trading: Evidence from the exchange-traded fund markets. International Review of Financial Analysis, 20(5), 292-305.
Chen, H.C., Ho, J.K., Lai, C. W. & Morales-Camargo, E. (2012). Institutional trading behaviour in the ETF market. Working Paper, Anderson School of Management. University of New Mexico.
Coval, J. & Stafford. E. (2007). Asset fire sales (and purchases) in equity markets. Journal of Financial Economics, 86, 479–512.
De Bondt, W. & Thaler, R. (1985). Does the Stock Market Overreact? The Journal of Finance, 40, 793-805. https://doi.org/10.1111/j.1540-6261.1985.tb05004.x
De Long, J. B., Shleifer, A., Summers, L. H. & Waldmann, R. J. (1990). Positive feedback investment strategies and destabilizing rational speculation. Journal of Finance, 45(2), 379–395.
Engle, R. & Sarkar, D. (2006). Premiums-discounts and exchange traded funds. Journal of Derivatives, 13(4), 27.
Fama, E.F. (1991). Efficient Capital Markets II. Journal of Finance, 46, 1575–1643.
Farmer, J.D. (2002). Market Force, Ecology and Evolution. Industrial and Corporate Change,  11(5), 895-953.
Flood, C. (2012). ETFs to attract more retail investors in Europe. published on: 19/10/ 2012 in the Financial Times. Available at: http://www.ft.com/intl/cms/s/0/ 80f9e9a819f011e2a37900144feabdc0.html#axzz2HIsEmpY9
Friedman, M. (1953). The Case for Flexible Exchange Rates. Essays in Positive Economics, University of Chicago Press, Chicago.
Glosten, L. R., Jagannathan, R. & Runkle, D. E. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. Journal of Finance, 48(5), 1779–1801.
Harris, R. D. F. & Pisedtasalasai, A. (2006). Return and volatility spillovers between large and small stocks in the UK. Journal of Business Finance & Accounting, 33(9–10), 1556-1571.
Hill, J. & Teller, S. (2010). Hedging with inverse ETFs: A primer. Journal of Indexes, 18–24.
Hilliard, J. (2014). Premiums and discounts in ETFs: An analysis of the arbitrage mechanism in domestic and international funds. Global Finance Journal, 25(2), 90-107.‏
Hirose, T., Kato, H. K. & Bremer, M. (2009). Can margin traders predict future stock returns in Japan? Pacific-Basin Finance Journal, 17(1), 41-57.‏
Imeni, M. & Kaviani, M. (2025). Investigating the Analysis of Pricing Efficiency in Exchange Tradable Funds (ETFs) from the Tehran Stock Exchange. Journal of Investment Knowledge, 14(56), 209-231. doi: 10.30495/jik.2024.69832.4093 (in Persian)
Jegadeesh, N. & Titman, S. (2001). Profitability of momentum strategies: An evaluation of alternative explanations. Journal of Finance, 56(2), 699–720.
Kallinterakis, V., Liu, F., Pantelous, A. A. & Shao, J. (2020). Pricing inefficiencies and feedback trading: Evidence from country ETFs. International Review of Financial Analysis, 70, 101498.
Kaviani, M. & Aghaee, M. S. (2023). Analysis of the refinement fund's portfolio from start-up to sectorfund; comparison of theory with practice. Financial and Banking Strategic Studies, 1(3), 167-177.‏ (in Persian)
Kaviani, M., Fakhrehosseini, S. F. & Najafpoor, S. (2024). The efficiency of tracking gold exchange-traded funds in the Tehran Stock Exchange: analysis of tracking error and double beta model. Journal of Decisions and Operations Research, 9(3), 747-759. doi: 10.22105/dmor.2024.475908.1867(in Persian)
Kaviani, M., Gavara, M. & Mansour Gorgani, A. (2024). Analysis of Tracking Performance and Tracking Error in the Exchange-Traded Fund in Tehran Stock Exchange. Journal of Monetary & Banking Research, 17(59), 127-154.‏ (in Persian)
Kaviani, M., Gavara, M. & Nazari, Z. (2024). An Analysis of the Volatility and Return Spillover of Venture Capital ETFs in the Tehran Stock Exchange. Advances in Finance and Investment, 5(14), 29-48.‏ (in Persian)
Kogan, L., Ross, S.A., Wang, J. & Westerfield, M.M. (2006). The price impact and survival of irrational traders. The Journal of Finance, 61(1), 195–229.
Koutmos, G. (2014). Positive feedback trading: a review. Review of Behavioral Finance, 6(2), 155-162.
Kurov, A. (2008). Investor sentiment, trading behavior and informational efficiency in index futures markets. Financial Review, 43(1), 107-127.
Lo, A. W., Mamaysky, H. & Wang, J. (2000). Foundations of technical analysis: Computational algorithms, statistical inference, and empirical implementation. Journal of Finance, 55(4), 1705–1765.
Luskin, D. L. (1988). Portfolio Insurance: a guide to dynamic hedging. (No Title).
Madura, J. & Richie, N. (2004). Overreaction of exchange-traded funds during the bubble of 1998–2002. Journal of Behavioral Finance, 5, 91–104.
Mankiw, N. G., Romer, D. & Shapiro, M. D. (1985). An unbiased reexamination of stock market volatility. The Journal of Finance, 40(3), 677–687.
Matsushima, H. (2013). Behavioral aspects of arbitrageurs in timing games of bubbles and crashes. Journal of Economic Theory, 148(2), 858-870.
McGuire, W. J. & Helmrich, R. F. (2008). The SEC’s ETF rule proposal: Key issues for the future exchange traded products. Investment Lawyer, 15, 1-13.
Miwa, K. & Ueda, K. (2011). A Dynamic Volume-Return Relation and Investors’ Positive Feedback Trading. International Review of Finance, 11(3), 325-351.
Modigliani, F. & Miller, M. H. (1961). Dividend policy, growth, and the valuation of shares. The Journal of Business, 34(4), 411–433.
Osler, C. L. (2005). Stop-loss orders and price cascades in currency markets. Journal of international Money and Finance, 24(2), 219-241.
Scheinkman, J.A. & Xiong, W. (2003). Overconfidence and speculative bubbles. Journal of Political Economy, 111, 1183–1220.
Sentana, E. & Wadhwani, S. (1992). Feedback traders and stock return autocorrelations: Evidence from a century of daily data. The Economic Journal, 102(411), 415–425.
Shaer Attar, M. & Mirzapour Babajan, A. (2023). Feedback Trading Strategy and Investors Behavior in Exchange Traded Fund in Iran. Financial Management Perspective, 13(42), 91–116. https://doi.org/10.48308/jfmp.2023.103951 (in Persian)
Financial Research Journal
Volume 28, Issue 3
2026
Pages 860-884