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- Title
Index Design: Hedging and Manipulation.
- Authors
Jarrow, Robert; Li, Siguang
- Abstract
This paper studies optimal index design to facilitate both hedging and alleviate illegal manipulation in a competitive equilibrium paradigm, modified to deal with manipulation. Specifically, a large trader is trading both derivatives and assets that effectively hides her trades behind the competitive market clearing mechanism. Unlike the strategic game paradigm, a volume-weighted average pricing (VWAP) index introduces basis risk and encourages manipulation because of the additional randomness in volume weight and the greater price impact enjoyed by the large trader. In contrast, an equal-weighted average pricing (EWAP) index preserves market completeness and discourages manipulation.
- Subjects
STRATEGY games; HEDGING (Finance); MARKET manipulation; OVER-the-counter markets
- Publication
Quarterly Journal of Finance, 2022, Vol 12, Issue 2, p1
- ISSN
2010-1392
- Publication type
Article
- DOI
10.1142/S2010139222500057