IDEAS home Printed from https://ideas.repec.org/p/fmg/fmgdps/dp531.html
   My bibliography  Save this paper

Spot Market Power and Future Market Trading

Author

Listed:
  • Stephen Shore
  • Alexander Muermann

Abstract

When a spot market monopolist participates in the futures market, he has an incentive to adjust spot prices to make his futures market position more pro.table. Rational futures market makers take this into account when they set prices. Spot market power thus creates a moral hazard problem which parallels the adverse selection problem in models with inside information. This moral hazard not only reduces the optimal amount of hedging for those with and without market power, but also makes complete hedging impossible. When market makers cannot distinguish orders placed by those with and without market power, market power provides a venue for strategic trading and market manipulation. The monopolist will strategically randomize his futures market position and then use his market power to make this position pro.table. Furthermore, traders without market power can manipulate futures prices by hiding their orders behind the monopolist.s strategic trades.

Suggested Citation

  • Stephen Shore & Alexander Muermann, 2005. "Spot Market Power and Future Market Trading," FMG Discussion Papers dp531, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp531
    as

    Download full text from publisher

    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp531.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ioannidis, Filippos & Kosmidou, Kyriaki & Makridou, Georgia & Andriosopoulos, Kostas, 2019. "Market design of an energy exchange: The case of Greece," Energy Policy, Elsevier, vol. 133(C).
    2. World Bank, 2009. "Land Reform, Rural Development, and Poverty in the Philippines : Revisiting the Agenda," World Bank Publications - Reports 18545, The World Bank Group.
    3. Stahn Kerstin, 2011. "Changes in Import Pricing Behaviour: Evidence for Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 231(4), pages 522-545, August.
    4. Zorana Božić & Dušan Dobromirov & Jovana Arsić & Mladen Radišić & Beata Ślusarczyk, 2020. "Power Exchange Prices: Comparison of Volatility in European Markets," Energies, MDPI, vol. 13(21), pages 1-15, October.
    5. Ma, Shanshan & Li, Guo & Sethi, Suresh P. & Zhao, Xuan, 2022. "Advance booking discount strategies: Competition, information transparency and spot market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 158(C).
    6. Widede Labidi & Sami Mensi, 2015. "Does Banking Market Power Matter on Financial (In)Stability? Evidence from the Banking Industry MENA Region," Working Papers 908, Economic Research Forum, revised May 2015.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fmg:fmgdps:dp531. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: The FMG Administration (email available below). General contact details of provider: http://www.lse.ac.uk/fmg/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.