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

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate
Published on 24 October 1997

Working paper No. 70
By Jo Corkish, Allison Holland and Anne Fremault Vila

This paper documents contract innovation in the context of the London International Financial Futures Exchange (LIFFE). We find that most of LIFFE’s contracts met traditional benchmarks of success in their early years of trading. This however, proved to be neither a necessary nor a sufficient condition for success. Market liquidity in terms of both execution risk and transaction costs is shown to be fairly constant across active LIFFE contracts. As expected, we find that contract success is highly correlated with the size of the underlying market, as well as with its volatility. We further confirm the existence of a first-mover advantage.

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