The Determinants of Successful Financial Innovation: an Empirical Analysis of Futures Innovation on LIFFE
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.
|Date of creation:||Oct 1997|
|Contact details of provider:|| Postal: Bank of England, Threadneedle Street, London, EC2R 8AH|
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Robert C. Merton, 1992. "Financial Innovation And Economic Performance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 12-22.
- 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.
- 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.
- John D. Finnerty, 1992. "An Overview Of Corporate Securities Innovation," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 23-39.
- 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.
- Merton H. Miller, 1992. "Financial Innovation: Achievements And Prospects," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 4-11.
- 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.
- 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.
- 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.
- Douglas Gale, 1992. "Standard Securities," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 731-755.
- 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.
- Rahi Rohit, 1995. "Optimal Incomplete Markets with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 65(1), pages 171-197, February.
- Tashjian, Elizabeth, 1995. "Optimal futures contract design," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(2), pages 153-162.
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:70. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team)
If references are entirely missing, you can add them using this form.