The Flipside of Financial Innovation: Why Contracts Fail*

Abstract

We examine factors that predict the success and failure of financial product innovations using a novel comprehensive database, which contains surviving and defunct commodity futures contracts traded on 36 exchanges between 1871 and 2022. New products are more likely to fail if they do not sufficiently compensate investors for risk, or if they experience extreme returns. Contracts are also less likely to survive if they face significant competitive pressure from other products or exchanges. Finally, innovations fail because they experience systemic shocks to the financial intermediary sector such as wars.

Keywords: Financial Innovation, Futures Markets, Hazard Models, Survival, Commodities, Competition, Risk Premium

JEL Classification: B26,G2,G13,G23,O30