Traders with short horizons and privately known trading limits interact in a market for a risky asset. Risk-averse, long horizon traders supply a downward sloping residual demand curve that face the short-horizon traders. When the price falls close to the trading limits of the short horizon traders, selling of the risky asset by any trader increases the incentives for others to sell. Sales becomes strategic complements between the short term traders, and payoffs analogous to a bank run are generated. A "liquidity black hole" is the analogue of the run outcome in a bank run model. Short horizon traders sell because others sell. Using global game techniques, this paper solves for the unique trigger point at which the liquidity black hole comes into existence. Empirical implications include the sharp V-shaped pattern in prices around the time of the liquidity black hole
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Markus K. Brunnermeier & Lasse Heje Pedersen, 2005.
"Predatory Trading,"
Journal of Finance,
American Finance Association, vol. 60(4), pages 1825-1863, 08.
[Downloadable!] (restricted)
Other versions:
Markus K. Brunnermeier & Lasse Heje Pedersen, 2004.
"Predatory Trading,"
NBER Working Papers
10755, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Markus K Brunnermeier & Lasse Heje Pederson, 2003.
"Predatory Trading,"
FMG Discussion Papers
dp441, Financial Markets Group.
[Downloadable!] (restricted)
Brunnermeier, Markus K & Pedersen, Lasse Heje, 2004.
"Predatory Trading,"
CEPR Discussion Papers
4639, C.E.P.R. Discussion Papers.
[Downloadable!] (restricted)
Grossman, S.J. & Miller, M.H., 1988.
"Liquidity And Market Structure,"
Papers
88, Princeton, Department of Economics - Financial Research Center.
Other versions:
Antonio E. Bernardo & Ivo Welch, 2002.
"Financial Market Runs,"
NBER Working Papers
9251, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Andrei Shleifer & Robert W. Vishny, 1995.
"The Limits of Arbitrage,"
NBER Working Papers
5167, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Shleifer, Andrei & Vishny, Robert W, 1997.
" The Limits of Arbitrage,"
Journal of Finance,
American Finance Association, vol. 52(1), pages 35-55, March.
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Markus K. Brunnermeier & Lasse Heje Pedersen, 2004.
"Predatory Trading,"
NBER Working Papers
10755, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Markus K Brunnermeier & Lasse Heje Pederson, 2003.
"Predatory Trading,"
FMG Discussion Papers
dp441, Financial Markets Group.
[Downloadable!] (restricted)
Brunnermeier, Markus K & Pedersen, Lasse Heje, 2004.
"Predatory Trading,"
CEPR Discussion Papers
4639, C.E.P.R. Discussion Papers.
[Downloadable!] (restricted)
Markus K. Brunnermeier & Lasse Heje Pedersen, 2005.
"Predatory Trading,"
Journal of Finance,
American Finance Association, vol. 60(4), pages 1825-1863, 08.
[Downloadable!] (restricted)