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Can position limits restrain ‘rogue’ trading?

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  • ap Gwilym, Rhys
  • Ebrahim, M. Shahid

Abstract

This paper studies the imposition of position limits on commodity futures from the perspective of curbing excessive speculation and thus manipulation. We present a simple general equilibrium model in a static rational expectations framework and agent heterogeneity to illustrate that excessive speculation serves to enrich other agents at the expense of the speculator. Position limits, on the contrary, are not only superfluous, but also counter-productive, as they exacerbate market power and lead to a deterioration in efficiency. Position limits not only reduce social welfare but also cannot restrain market manipulation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 3 ()
Pages: 824-836

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:3:p:824-836

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Position limits; Dodd–Frank Act; Winner’s curse;

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