1 School of Economics and Management, Faculty of Social Sciences, Aarhus University, Aarhus University2 Department of Economics and Business Economics, Aarhus BSS, Aarhus University3 School of Accounting, Economics and Finance, Edith Cowan University4 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
More liquid financial contracts are claimed to draw trading volume from contracts for which they are close substitutes. We provide the first analysis of how trading volume across existing financial contracts is affected by changes in the factors that govern the degree to which they are substitutes. Using data on DAX options with different strike prices, we identify these factors and their impact on the distribution of trades across contracts. The results are relevant for exchange design since they help gauge when options with different strike prices are good (bad) substitutes and the strike price grid should be coarse (fine).
Review of Applied Economics, 2007, Vol 3, Issue 1-2, p. 25-48