Manipulation of Illiquid Asset Indexes
23 Pages Posted: 26 Feb 2016
Date Written: February 24, 2016
We develop a model of manipulation of indexes, whose components are illiquid in that they require fair valuation based on comparable instruments. Such an index may be susceptible to manipulation since distorting the prices of only a few assets could potentially shift its value. Our model provides a measure of the manipulability of an index and identifies which assets are most likely to be manipulated. We apply our model to analyze the manipulability of national municipal bond indexes subject to various bond size thresholds.
Keywords: Manipulation, Index, Derivatives, Exchange-traded Funds, Fixed Income, Municipal Bonds, Liquidity, Regulation
JEL Classification: G18, G23, G28
Suggested Citation: Suggested Citation