Is the Market Being Fooled? An Error-Based Screen for Manipulation

49 Pages Posted: 16 Aug 2007

See all articles by Rosa M. Abrantes-Metz

Rosa M. Abrantes-Metz

Global Economics Group, LLC; New York University - Leonard N. Stern School of Business - Department of Economics

Sumanth Addanki

NERA Economic Consulting

Date Written: August 2007

Abstract

In this paper, we develop a new screen to detect manipulation in commodities markets. If manipulation is occurring, not all of the relevant information is being filtered through the market, which means that the market is being "fooled" and its ability to forecast future prices is impaired. If futures prices are the market's estimates of future spot prices, manipulation can be expected, therefore, to result in larger first and second moments of the forecast error in those prices, controlling for other factors (not related to manipulation) that could affect risk premium. We apply our technique to the Hunt Brothers' silver manipulation episode of 1979-80. After controlling for market and macroeconomic fundamentals not affected by manipulation (but which could explain variations in risk premium), we find that the variance of the bias is significantly larger under manipulation, and the mean reverses sign consistent with backwardation.

Keywords: Manipulation, Screen, Futures Prices, Spot Prices, Commodities Markets, Forecasting Errors, Risk Premium, Basis

JEL Classification: C39, C51, C53, G19, K21, K49

Suggested Citation

Abrantes-Metz, Rosa M. and Addanki, Sumanth, Is the Market Being Fooled? An Error-Based Screen for Manipulation (August 2007). Available at SSRN: https://ssrn.com/abstract=1007348 or http://dx.doi.org/10.2139/ssrn.1007348

Rosa M. Abrantes-Metz (Contact Author)

Global Economics Group, LLC ( email )

22 Cortlandt Street
Suite 1600
New York, NY 10007
United States
(917) 499-4944 (Phone)

HOME PAGE: http://www.globaleconomicsgroup.com

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

Sumanth Addanki

NERA Economic Consulting ( email )

United States

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