AbstractThis paper develops a theory of strategic trading in markets with large arbitrageurs. If arbitrageurs are not well capitalized, capital constraints make their trades predictable. Other market participants can exploit this by trading against them. Competitors may find it optimal to lend to arbitrageurs that are financially fragile; additional capital makes the arbitrageurs more viable, and lenders can reap profits from trading against them for a longer time. The strategic behavior of these market participants has implications for the functioning of financial markets. Strategic trading may produce significant price distortions, increase price manipulation, and trigger forced liquidations of large traders. Copyright 2005 by The American Finance Association.
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Bibliographic InfoArticle provided by American Finance Association in its journal The Journal of Finance.
Volume (Year): 60 (2005)
Issue (Month): 5 (October)
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- Dimitri Vayanos & Jiang Wang, 2012.
"Market Liquidity — Theory and Empirical Evidence,"
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- Schoeneborn, Torsten & Schied, Alexander, 2007. "Liquidation in the Face of Adversity: Stealth Vs. Sunshine Trading, Predatory Trading Vs. Liquidity Provision," MPRA Paper 5548, University Library of Munich, Germany.
- Ilhyock Shim & Goetz von Peter, 2007. "Distress selling and asset market feedback," BIS Working Papers 229, Bank for International Settlements.
- Selcuk, Cemil, 2012. "Distressed sales and liquidity in OTC markets," MPRA Paper 38188, University Library of Munich, Germany.
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