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An empirical investigation of large trader market manipulation in derivatives markets

Author

Listed:
  • Robert Jarrow

    (Cornell University
    Kamakura Corporation)

  • Scott Fung

    (California State University, East Bay)

  • Shih-Chuan Tsai

    (National Taiwan Normal University
    Taiwan Futures Exchange)

Abstract

Using account-level transaction data in options and futures markets, we investigate the existence of market manipulation, which is the ability of large traders to trade strategically, impacting prices and making abnormal profits. First, large trader’s option positions have a quantity impact on the underlying asset’s price. Second, large traders generate significantly positive alphas from trading options and futures. Among the different investor types, proprietary dealers generate the largest positive alphas. Third, these abnormal returns are consistent with strategic trading and cross-market manipulation. The evidence supports market manipulation across the options and futures markets, but not within the futures market itself.

Suggested Citation

  • Robert Jarrow & Scott Fung & Shih-Chuan Tsai, 2018. "An empirical investigation of large trader market manipulation in derivatives markets," Review of Derivatives Research, Springer, vol. 21(3), pages 331-374, October.
  • Handle: RePEc:kap:revdev:v:21:y:2018:i:3:d:10.1007_s11147-018-9143-0
    DOI: 10.1007/s11147-018-9143-0
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    References listed on IDEAS

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    Cited by:

    1. Hannes Mohrschladt & Judith C. Schneider, 2021. "Idiosyncratic volatility, option-based measures of informed trading, and investor attention," Review of Derivatives Research, Springer, vol. 24(3), pages 197-220, October.
    2. Behzad Alimoradian & Karim Barigou & Anne Eyraud-Loisel, 2022. "Derivatives under market impact: Disentangling cost and information," Working Papers hal-03668432, HAL.

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    More about this item

    Keywords

    Market manipulation; Futures; Options; Positive alphas; Strategic trading;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G19 - Financial Economics - - General Financial Markets - - - Other

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