Price Destabilizing Speculation: The Role of Strategic Limit Orders

Suman Banerjee, Ravi Jagannathan and Kai Wang

No 30828, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using a two-period model of a commodity market with a large number of atomistic consumers and two strategic sellers, we show that a speculator with access to storage can lower the market price while buying and raise the price while selling by clever use of limit, stop-loss, and market orders. The speculator profits from it. This creates price volatility even though there is no demand or supply uncertainty, and all market participants act rationally. Prices are more volatile when the speculator has access to free disposal. Such speculative activity makes the strategic sellers worse off and consumers better off. Our results are robust to introducing demand uncertainty, having more than one large speculator, and more than two strategic sellers. When there are multiple strategic sellers consumers can be worse off.

JEL-codes: G0 G1 G10 G12 G18 G19 (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-com and nep-gth
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