A Corner Solution: Commodity Futures, Default Fines, and Unintended Consequences

Wojtek Sikorzewski

New York Economic Review, 2002, vol. 33, issue 1, 3-16

Abstract: We analyze one specific form of market manipulation - corners (or squeezes) in some commodity futures markets. In the analysis we focus on the role of institutional factors such as the storage capacity at the delivery point and the severity of fines imposed on defaulting shorts. We analyze the influence of these factors on the likelihood that a corner-style manipulation might occur.A reduction in storage capacity or an increase in the amount of fines imposed on defaulting shorts increases the probability of the occurrence. However, the latter factor seems quiet paradoxical. A high level of fines in case of default on a futures contract should decrease the number of defaults and thus make a futures contract more reliable. But, it tends to make the corners more frequent and thus makes the futures contracts less useful for the hedgers.

Date: 2002
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