Stock Price Manipulation, Market Microstructure and Asymetric Information
AbstractIn recent years, there has been a large literature on how stock exchange specialists set prices when there are investors who know more about the stock than they do. An important assumption in this literature is that there are *liquidity traders* who are equally likely to buy or sell for exogenous reasons. It is plausible that some buyers have cash needs and are forced to sell their stock. However, buyers will usually be able to choose the time at which they trade. It will be optimal for them to minimize the probability of trading with informed investors by choosing an appropriate time to trade and clustering at that time. This asymmetry means that when liquidity buyers are not clustering, purchases are more likely to be by an informed trader than sales so the price movement resulting from a purchase is larger than for a sale. As a result, profitable manipulation by uninformed investors may occur. A model where the specialist takes account of the possibility of manipulation in equilibrium is presented.
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Bibliographic InfoPaper provided by Wharton School - Weiss Center for International Financial Research in its series Weiss Center Working Papers with number 21-91.
Length: 10 pages
Date of creation: 1991
Date of revision:
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Web page: http://finance.wharton.upenn.edu/weiss/
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investments ; cash flow ; economic equilibrium ; financial market;
Other versions of this item:
- Allen, Franklin & Gorton, Gary, 1992. "Stock price manipulation, market microstructure and asymmetric information," European Economic Review, Elsevier, vol. 36(2-3), pages 624-630, April.
- Franklin Allen & Gary Gorton, 1991. "Stock Price Manipulation, Market Microstructure and Asymmetric Information," NBER Working Papers 3862, National Bureau of Economic Research, Inc.
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.:
- Benabou, R. & Laroque, G., 1988.
"Using Privileged Information To Manipulate Markets: Insiders, Gurus And Credibility,"
19, Princeton, Woodrow Wilson School - Discussion Paper.
- Benabou, Roland & Laroque, Guy, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 921-58, August.
- Benabou, R. & Laroque, G., 1989. "Using Privileged Information To Manipulate Markets: Insiders, Gurus, And Credibility," Working papers 513, Massachusetts Institute of Technology (MIT), Department of Economics.
- Benabou, R. & Laroque, G., 1992. "Using privileged information to manipulate markets: insiders, gurus, and credibility," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
- Vila, Jean-Luc, 1989. "Simple games of market manipulation," Economics Letters, Elsevier, vol. 29(1), pages 21-26.
- Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
- Jarrow, Robert A., 1992. "Market Manipulation, Bubbles, Corners, and Short Squeezes," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(03), pages 311-336, September.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
- Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-29.
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