The Impact of Financial Innovation and Risk Management on Economic Performance

Vedat Akgiray

Istanbul Stock Exchange Review, 1998, vol. 2, issue 5, 1-14

Abstract: The last 25 years have witnessed extensive financial innovation and this had led to revolutionary changes in the international financial system. It is true that financial innovation has been going on since the 17th century and most of the products developed during the last two decades, although mentioned as new, are only versions of much older products. When the history of financial innovation is studied, it is seen that the seemingly new instruments, such as options and futures are not entirely new. For example, organised futures exchanges were established in Chicago, Frankfurts and London in the 19th century. Options and futures-like contracts in Amsterdam and forward contracts in rice in Japan were traded in the 17th century. However, the proliferation of organised markets in derivatives securities around the world during the last two decades is unparalleled in history. Miller (1992) describes the 1970-1990 period as unique in history, in that “no 20-year in financial history has witnessed an even remotely comparable burst of innovative activity.” The development of such standardised markets has subsequently led to the design and implementation of a wide range of new financial products, some for everyone to use and some custom-made to meet specific needs of investors and corporations. To take a very small example out of the range of products developed in this period, it is sufficient only to mention financial futures, options and option-like products, swaps, exchangeable bonds, junk bonds, asset-based securitized investments and hybrids of these and others.

Date: 1998
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