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Strategic Interactions And Negative Oil Prices

Author

Listed:
  • CHENGHU MA

    (School of Management, Fudan University, P. R. China)

  • XIANZHEN WANG

    (School of Management, Fudan University, P. R. China)

Abstract

This paper argues on theoretical grounds that the negative oil prices event on April 20, 2020, was mainly due to the strategic interactions among some active traders on both sides of the futures contract. We present a three-player game of futures trading in which a continuum range of negative price can be supported as (strong) Nash equilibrium, yet none of those constitutes an Ξ-equilibrium originally developed by Ma (2009). We further propose the notion of coalition-with-side-payment as a solution concept for the environment where strategic interactions and transfer payments among players are allowed. Our model captures the mechanism underlying futures price manipulation, and its predictions largely agree with the observations on that day, which are beyond the scope of demand–supply and physical delivery narratives.

Suggested Citation

  • Chenghu Ma & Xianzhen Wang, 2021. "Strategic Interactions And Negative Oil Prices," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 16(03), pages 1-33, September.
    • Handle: RePEc:wsi:afexxx:v:16:y:2021:i:03:n:s2010495221500135
    DOI: 10.1142/S2010495221500135
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