The Impact of Universal Stock Futures on Feedback Trading and Volatility Dynamics

Chau, F.; Holmes, P.; Paudyal, K.

Abstract

This paper investigates the impact of the introduction of Universal Stock Futures (USFs) on underlying market dynamics (volatility and the level of feedback trading). Analysis of USFs provides a number of advantages compared to investigation of index futures, leading to reliable and wider ranging insights into the impact of derivatives. Specifically: (i) any impact of derivatives is more likely to be evident in the behaviour of individual stocks; (ii) with USFs it is possible to directly trade the underlying; (iii) USFs have multiple introduction dates within a given market; (iv) differential country/industry effects can be identified; and (v) the endogeneity issue can be addressed using control stocks. Findings suggest limited feedback trading in USF stocks, but listing has reduced this further. While news has less impact and persistence and asymmetry effects are more evident post-futures, control stock results suggest these changes are not futures induced. Differences are evident across industries. The need for analysis of an appropriate (industry based) control sample is highlighted if reliable policy conclusions are to be reached.

Citation

Chau, F., Holmes, P., & Paudyal, K. (2008). The Impact of Universal Stock Futures on Feedback Trading and Volatility Dynamics. Journal of Business Finance and Accounting, 35(1-2), 227-249. https://doi.org/10.1111/j.1468-5957.2007.02067.x

• Journal Article Type: Article
• Publication Date: Jan 1, 2008
• Deposit Date: May 22, 2009
• Publicly Available Date: Mar 4, 2015
• Journal: Journal of Business Finance and Accounting
• Print ISSN: 0306-686X
• Electronic ISSN: 1468-5957
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 35
• Issue: 1-2
• Pages: 227-249
• DOI: https://doi.org/10.1111/j.1468-5957.2007.02067.x
• Keywords: Futures listing, Feedback trading, Volatility dynamics, Universal stock futures.
• Public URL: https://durham-repository.worktribe.com/output/1556646