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PRICE DESTABILIZING SPECULATION: THE ROLE OF STRATEGIC LIMIT ORDERS

Abstract

We show that under Cournot competition with only a few strategic producers, a speculator with a deep pocket and access to sufficient storage facility can have a destabilizing effect on commodity prices. The speculator, through clever use of limit orders, is able to pro t by buying low and selling high, and behaving like a pseudo-Stackelberg leader. This creates price volatility even though there is no fundamental uncertainty in the economy and all market participants act rationally. In the model economy, consumers can be strictly worse off when the speculator has access to free disposal of excess inventory. Our analysis shows that pro fitable destabilizing speculation, while feasible, may be difficult to sustain.

Type

Working Paper

Author(s)

Ravi Jagannathan, Suman Banerjee, Kei Wang

Date Published

2020

Citations

Jagannathan, Ravi, Suman Banerjee, and Kei Wang. 2020. PRICE DESTABILIZING SPECULATION: THE ROLE OF STRATEGIC LIMIT ORDERS.

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