Optimal Innovation of Futures Contracts
- 1 July 1989
- journal article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 2 (3) , 275-296
- https://doi.org/10.1093/rfs/2.3.275
Abstract
This article presents a simple model of the innovation of new futures contracts by transaction volume-maximizing futures exchanges in incomplete markets under uncertainty, with mean-variance preferences and proportional transactions costs. We characterize the set of Nash equilibria for a number of exchanges simultaneously or sequentially choosing contrasts. The optimal monopolistic contract design is shown to be Pareto-optimal. An example shows the failure of Pareto optimality for a particular Nash equilibrium. Likewise, in a monopolistic multiperiod setting, an example shows the failure of Pareto optimality given an incentive for the exchange to induce turnover.Keywords
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