Short-Selling Restriction, Price Squeeze, and Bond Futures Price Manipulation: A Theoretical and Empirical Analysis

Abstract

In an emerging futures market with short-selling restrictions on spot contracts, low margin requirements on futures contracts, and weak corporate governance, price squeeze and manipulation may occur. Price manipulators would be able to inflate both spot and futures prices and lead to the instability of the futures and spot markets. The Chinese government bond futures market, the first and the only financial futures ever existed in China, provides an opportunity to investigate the above conjecture. Using a unique data set including all contract series issued and traded between 1993 and 1995, this paper documents evidence of price squeeze and manipulation. Our evidence indicates that prior to the maturity month of government bond futures, price manipulators, taking the advantage of short-selling restrictions in the government bond spot market and very low margin requirements in the government bond futures, accumulate a significant amount of long positions for several selected issues without the intention to offset, which eventually leads to the collapse of the Chinese government bond futures market.