Abstract
This paper examines an anomaly called short squeeze and its consequences in the Bund futures market. By short squeeze, in the present context, is meant a phenomenon caused by the shortage of the cheapest-to-deliver Bunds in the market to meet the delivery requirement of the futures contract. The squeeze may be created by market participants who see the opportunity to corner the market for underlying in order to drive up the price of both the underlying asset and the derivative contract. The investigation is conducted by examining measures of relative mispricing, the implied value of the quality option embedded in the futures contract and the cost of choosing the second cheapest-to-deliver Bund. The results show some evidence of occasional squeezes in the Bund futures market. More importantly, the conditions that corroborate the manipulative behaviour are discussed.
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