Empirical Studies of Financial Innovation: Lots of Talk, Little Action?

W. Scott Frame and Lawrence J. White
Working Paper 2002-12
July 2002

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This paper reviews the extant empirical studies of financial innovation. Adopting broad criteria, the authors found just two dozen studies, over half of which (fourteen) had been conducted since 2000. Since some financial innovations are examined by more than one study, only fourteen distinct phenomena have been covered. Especially striking is the fact that only two studies are directed at the hypotheses advanced in many broad descriptive articles concerning the environmental conditions (e.g., regulation, taxes, unstable macroeconomic conditions, and ripe technologies) spurring financial innovation. The authors offer some tentative conjectures as to why empirical studies of financial innovation are comparatively rare. Among their suggested culprits is an absence of accessible data. The authors urge financial regulators to undertake more surveys of financial innovation and to make the survey data more available to researchers.

JEL classification: G00, O31

Key words: financial innovation, banking, securities, patents

The authors thank Allen Berger, Robert DeYoung, Richard Nelson, Peter Tufano, and seminar participants at the Federal Reserve Bank of Philadelphia's conference "Innovation in Financial Services and Payments" and the 2002 Western Economic Association International meetings. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to W. Scott Frame, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8783, 404-498-8810 (fax), scott.frame@atl.frb.org, or Lawrence J. White, Stern School of Business, New York University, 44 West 4th Street, New York, New York 10012-1126, 212-998-0880, 212-995-4218 (fax), lwhite@stern.nyu.edu.