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A Strategic Analysis of Corners and Squeezes

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  • Cooper, David J.
  • Donaldson, R. Glen

Abstract

We develop a dynamic game-theoretic model of a futures market in which prices can be manipulated by corner and squeeze. We investigate equilibrium trading strategies and the price dynamics these strategies produce. Price paths produced by our model can mimic observed prices for potentially comerable commodities and explain the volatility of certain prices even when no manipulations occur. Our model also generates occasional apparent price bubbles and accounts for the existence of normal backwardation in futures markets even when players are risk neutral.

Suggested Citation

  • 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.
  • Handle: RePEc:cup:jfinqa:v:33:y:1998:i:01:p:117-137_02
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    Cited by:

    1. Lien, Donald & Tse, Yiu Kuen, 2006. "A survey on physical delivery versus cash settlement in futures contracts," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 15-29.
    2. Nyborg, Kjell G. & Strebulaev, Ilya A., 2001. "Collateral and short squeezing of liquidity in fixed rate tenders," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 769-792, November.
    3. Merrick, John J. & Naik, Narayan Y. & Yadav, Pradeep K., 2004. "Strategic trading behavior and price distortion in a manipulated market: Anatomy of a squeeze," CFR Working Papers 04-07, University of Cologne, Centre for Financial Research (CFR).
    4. Chatrath, Arjun & Adrangi, Bahram & Allender, Mary, 2001. "The impact of margins in futures markets: evidence from the gold and silver markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(2), pages 279-294.
    5. Donald Lien & Mei Zhang, 2008. "A Survey of Emerging Derivatives Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(2), pages 39-69, March.
    6. Rydqvist, Kristian & Wu, Mark, 2016. "Pre-auction inventory and bidding behavior: Evidence from Canadian Treasury auctions," Journal of Financial Markets, Elsevier, vol. 30(C), pages 78-102.
    7. Rydqvist, Kristian & Wu, Mark, 2014. "Pre-Auction Inventory and Bidding Behavior—An Analysis of Canadian Treasury Auctions," CEPR Discussion Papers 10112, C.E.P.R. Discussion Papers.
    8. Merrick, John Jr & Naik, Narayan Y. & Yadav, Pradeep K., 2005. "Strategic trading behavior and price distortion in a manipulated market: anatomy of a squeeze," Journal of Financial Economics, Elsevier, vol. 77(1), pages 171-218, July.
    9. Donald Lien & Mei Zhang, 2008. "A Survey of Emerging Derivatives Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(2), pages 39-69, March.

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