Can position limits restrain ‘rogue’ trading?

Gwilym, Rhys ap; Ebrahim, Muhammed-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.

Citation

Gwilym, R. A., & Ebrahim, M. (2013). Can position limits restrain ‘rogue’ trading?. Journal of Banking and Finance, 37(3), 824-836. https://doi.org/10.1016/j.jbankfin.2012.10.025

• Journal Article Type: Article
• Acceptance Date: Oct 25, 2012
• Publication Date: 2013-03
• Deposit Date: Sep 22, 2014
• Journal: Journal of Banking and Finance
• Print ISSN: 0378-4266
• Publisher: Elsevier
• Volume: 37
• Issue: 3
• Pages: 824-836
• DOI: https://doi.org/10.1016/j.jbankfin.2012.10.025
• Public URL: https://durham-repository.worktribe.com/output/1445175