Can position limits restrain ‘rogue’ trading?

Rhys ap Gwilym and M. Shahid Ebrahim ()

Journal of Banking & Finance, 2013, vol. 37, issue 3, 824-836

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.

Keywords: Position limits; Dodd–Frank Act; Winner’s curse (search for similar items in EconPapers)
JEL-codes: D53 D58 D74 D91 G12 G13 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:3:p:824-836

DOI: 10.1016/j.jbankfin.2012.10.025

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