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Strategic trading behavior and price distortion in a manipulated market: Anatomy of a squeeze


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  • Merrick, John J.
  • Naik, Narayan Y.
  • Yadav, Pradeep K.
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    This paper investigates the trading behavior of major market participants during an attempted delivery squeeze in a bond futures contract traded in London. Using the cash and futures trades of dealers and customers, we analyze their strategic trading behavior, price distortion and learning in a market manipulation setting. We argue that the marked differences in the penalties for settlement failures in the cash and futures markets create conditions that favor squeezes. We recommend that regulators require special flagging of forward term repurchase agreements on the key deliverables that span futures contract maturity date, and exchanges remove the conditions that create squeeze incentives in the first place, e.g. mark-to-market their contract specifications much more frequently, or consider redefining the contract to be cash-settled on a basket of traded bonds. -- In diesem Papier wird das Handelsverhalten großer Marktteilnehmer während des Versuchs einer künstlich erzeugten Marktknappheit untersucht. Wir betrachten den in London gehandelten Bond-Future Kontrakt. Unter Verwendung der Cash- und Future-Transaktionen von Händlern und Kunden untersuchen wir deren strategisches Handelsverhalten, Preisverzerrungen und das Lernen von Marktteilnehmern während der Marktmanipulation. Wir zeigen, dass die deutlichen Unterschiede in den Strafzahlungen für Lieferausfälle zwischen dem Cash- und Futures-Markt eine Marktmanipulation begünstigen. Wir schlagen verschiedene regulatorische Maßnahmen vor, mit denen solche Marktmanipulationen verhindert werden können.

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    Bibliographic Info

    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 04-07.

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    Date of creation: 2004
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    Handle: RePEc:zbw:cfrwps:0407

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    Related research

    Keywords: Price manipulation; Futures markets; Squeeze;

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    1. Stephen J. Brown & William N. Goetzmann & James M. Park, 1998. "Hedge Funds and the Asian Currency Crisis of 1997," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-014, New York University, Leonard N. Stern School of Business-.
    2. Joshua D. Coval, 2001. "Is Sound Just Noise?," Journal of Finance, American Finance Association, vol. 56(5), pages 1887-1910, October.
    3. Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
    4. Barnhill, Theodore M., 1990. "Quality Option Profits, Switching Option Profits, and Variation Margin Costs: An Evaluation of Their Size and Impact on Treasury Bond Futures Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(01), pages 65-86, March.
    5. Chatterjea, Arkadev & Jarrow, Robert A., 1998. "Market Manipulation, Price Bubbles, and a Model of the U.S. Treasury Securities Auction Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(02), pages 255-289, June.
    6. Epps, Thomas W, 1975. "Security Price Changes and Transaction Volumes: Theory and Evidence," American Economic Review, American Economic Association, vol. 65(4), pages 586-97, September.
    7. Duffie, Darrell, 1996. " Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
    8. Boyle, Phelim P, 1989. " The Quality Option and Timing Option in Futures Contracts," Journal of Finance, American Finance Association, vol. 44(1), pages 101-13, March.
    9. Copeland, Thomas E, 1976. "A Model of Asset Trading under the Assumption of Sequential Information Arrival," Journal of Finance, American Finance Association, vol. 31(4), pages 1149-68, September.
    10. Cooper, David J. & Donaldson, R. Glen, 1998. "A Strategic Analysis of Corners and Squeezes," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(01), pages 117-137, March.
    11. Dunn, Kenneth B. & Spatt, Chester S., 1984. "A strategic analysis of sinking fund bonds," Journal of Financial Economics, Elsevier, vol. 13(3), pages 399-423, September.
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