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Futures Exchange Innovations: Reinforcement versus Cannibalism

  • Joost M.E. Pennings

    (University of Illinois at Urbana-Champaign)

  • Raymond M. Leuthold

    (University of Illinois at Urbana-Champaign)

Futures exchanges are in constant search of futures contracts that will generate a profitable level of trading volume. In this context, it would be interesting to determine what effect the introduction of new futures contracts have on the trading volume of the contracts already listed. The introduction of new futures contracts may lead to a volume increase for those contracts already listed and hence, contribute to the success of a futures exchange. On the other hand, the introduction of new futures contracts could lead to a volume decrease for the contracts already listed, thereby undermining the success of the futures exchange accordingly. Using a multi-product hedging model in which the perspective has been shifted from portfolio to exchange management, we study these effects. Using data from two exchanges that are different regarding market liquidity (Amsterdam Exchanges versus Chicago Board of Trade) we show the usefulness of the proposed tool. Our findings have several important implications for a futures exchange's innovation policy.

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File URL: http://econwpa.repec.org/eps/fin/papers/9905/9905003.pdf
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Paper provided by EconWPA in its series Finance with number 9905003.

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Length: 34 pages
Date of creation: 01 May 1999
Date of revision:
Handle: RePEc:wpa:wuwpfi:9905003
Note: Type of Document - PDF; prepared on IBM PC ; pages: 34 ; figures: included. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 99-03. For a complete list of OFOR working papers see http://w3.ag.uiuc.edu/ACE/ofor
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  1. 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.
  2. Lapan, Harvey E. & Moschini, GianCarlo, 1994. "Futures Hedging Under Price, Basis and Production Risk," Staff General Research Papers 10041, Iowa State University, Department of Economics.
  3. Anderson, Ronald W & Danthine, Jean-Pierre, 1980. " Hedging and Joint Production: Theory and Illustrations," Journal of Finance, American Finance Association, vol. 35(2), pages 487-98, May.
  4. Mark Britten-Jones, 1999. "The Sampling Error in Estimates of Mean-Variance Efficient Portfolio Weights," Journal of Finance, American Finance Association, vol. 54(2), pages 655-671, 04.
  5. Robert C. Merton, 1995. "Financial Innovation and the Management and Regulation of Financial Institutions," NBER Working Papers 5096, National Bureau of Economic Research, Inc.
  6. Robert Ferguson & Dean Leistikow, 1998. "Are regression approach futures hedge ratios stationary?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(7), pages 851-866, October.
  7. Meyer, Jack & Rasche, Robert H, 1992. "Sufficient Conditions for Expected Utility to Imply Mean-Standard Deviation Rankings: Empirical Evidence Concerning the Location and Scale Condition," Economic Journal, Royal Economic Society, vol. 102(410), pages 91-106, January.
  8. 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.
  9. Kilcollin, T. Eric & Frankel, Michael E. S., 1993. "Futures and options markets: Their new role in Eastern Europe," Journal of Banking & Finance, Elsevier, vol. 17(5), pages 869-881, September.
  10. 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.
  11. Rolfo, Jacques, 1980. "Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 100-116, February.
  12. Chang, Carolyn W & Chang, Jack S K & Fang, Hsing, 1996. "Optimal Futures Hedge with Marketing-to-Market and Stochastic Interest Rates," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(3), pages 309-26, Fall.
  13. Goldberg, Lawrence G. & Hachey, George Jr., 1992. "Price volatility and margin requirements in foreign exchange futures markets," Journal of International Money and Finance, Elsevier, vol. 11(4), pages 328-339, August.
  14. Gemmill, Gordon, 1994. "Margins and the safety of clearing houses," Journal of Banking & Finance, Elsevier, vol. 18(5), pages 979-996, October.
  15. Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1182-96, December.
  16. Pulley, Lawrence B., 1981. "A General Mean-Variance Approximation to Expected Utility for Short Holding Periods," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(03), pages 361-373, September.
  17. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March.
  18. Bigelow, John Payne, 1993. "Consistency of mean-variance analysis and expected utility analysis : A complete characterization," Economics Letters, Elsevier, vol. 43(2), pages 187-192.
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