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

23 Pages Posted: 15 Feb 2008

See all articles by Frankie Chau

Frankie Chau

Durham University Business School

Phil Holmes

Durham University

Krishna Paudyal


Date Written: 2007-09


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 behavior 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.

Suggested Citation

Chau, Frankie and Holmes, Phil and Paudyal, Krishna N., The Impact of Universal Stock Futures on Feedback Trading and Volatility Dynamics (2007-09). Journal of Business Finance & Accounting, Vol. 35, Issue 1-2, pp. 227-249, January-March 2008. Available at SSRN: or

Frankie Chau (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Phil Holmes

Durham University ( email )

Dept. of Economics & Finance 23-26 Old Elvet
Durham DH1 3HY
United Kingdom
+44 191 374 5975 (Phone)
+44 191 374 7289 (Fax)

Krishna N. Paudyal

Independent ( email )

No Address Available

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