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The Determinants of Successful Financial Innovation: an Empirical Analysis of Futures Innovation on LIFFE

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  • Jo Corkish
  • Allison Holland
  • Anne Fremault Vila

Abstract

This paper documents futures innovation on LIFFE by empirically analyzing the individual growth profiles of its futures contracts and the factors that determine contract success or failure. The paper documents considerable heterogeneity across contracts, and finds that contract success can not easily be inferred from the contract's first years of trading. As expected, contract success is highly correlated with the size of the underlying market, as well as with its volatility. The paper also confirms the existence of a first-mover advantage. There is little systematic correlation, however, between bid-ask spreads and futures volume. This suggests that there may be a critical level of trading activity beyond which bid-ask spreads and execution risk vary relatively little. It is further argued that liquidity seems less a cause of contract success (or lack of liquidity a cause of failure), but rather a consequence. These results may provide a useful perspective as exchanges prepare themselves for the planned monetary unification. Successful product innovation will be critical since exchanges may face a drop in demand with reduced monetary uncertainty, and a reduction of the current spectrum of interest rate contracts to Euro contracts only. A related question is whether a futures markets needs a well developed spot market to succeed, or whether the creation of a futures market could help to boost liquidity in a fledgling spot market.

Suggested Citation

  • Jo Corkish & Allison Holland & Anne Fremault Vila, 1997. "The Determinants of Successful Financial Innovation: an Empirical Analysis of Futures Innovation on LIFFE," Bank of England working papers 70, Bank of England.
  • Handle: RePEc:boe:boeewp:70
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1997/wp70.pdf
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    References listed on IDEAS

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    1. Rahi Rohit, 1995. "Optimal Incomplete Markets with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 65(1), pages 171-197, February.
    2. Francis Breedon, 1996. "Why do the LIFFE and DTB bund futures contracts trade at different prices?," Bank of England working papers 57, Bank of England.
    3. Bessembinder, Hendrik & Seguin, Paul J., 1993. "Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 21-39, March.
    4. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
    5. Cuny, Charles J, 1993. "The Role of Liquidity in Futures Market Innovations," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 57-78.
    6. John D. Finnerty, 1992. "An Overview Of Corporate Securities Innovation," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 23-39.
    7. Miller, Merton H., 1986. "Financial Innovation: The Last Twenty Years and the Next," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(04), pages 459-471, December.
    8. Tashjian, Elizabeth, 1995. "Optimal futures contract design," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(2), pages 153-162.
    9. Merton H. Miller, 1992. "Financial Innovation: Achievements And Prospects," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 4-11.
    10. Robert C. Merton, 1992. "Financial Innovation And Economic Performance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 12-22.
    11. Roll, Richard, 1984. " A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-1139, September.
    12. Tashjian Elizabeth & Weissman Maayana, 1995. "Advantages to Competing with Yourself: Why an Exchange Might Design Futures Contracts with Correlated Payoffs," Journal of Financial Intermediation, Elsevier, vol. 4(2), pages 133-157, April.
    13. Johnston, Elizabeth Tashjian & McConnell, John J, 1989. "Requiem for a Market: An Analysis of the Rise and Fall of a Financial Futures Contract," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 1-23.
    14. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
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    Cited by:

    1. A. Bernales, 2014. "The Effects of Information Asymmetries on the Ex-Post Success of Stock Option Listings," Working papers 495, Banque de France.
    2. repec:kap:apfinm:v:25:y:2018:i:2:d:10.1007_s10690-018-9239-4 is not listed on IDEAS
    3. Hung, Mao-Wei & Lin, Bing-Huei & Huang, Yu-Chuan & Chou, Jian-Hsin, 2011. "Determinants of futures contract success: Empirical examinations for the Asian futures markets," International Review of Economics & Finance, Elsevier, vol. 20(3), pages 452-458, June.
    4. Bernales, Alejandro, 2017. "The success of option listings," Journal of Empirical Finance, Elsevier, vol. 40(C), pages 139-161.

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