Joost M.E. Pennings
Department of Agricultural and Consumer Economics
The University of Illinois at Urbana-Champaign
Raymond M. Leuthold
Department of Agricultural and Consumer Economics
University of Illinois at Urbana-Champaign
Abstract
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.