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Predatory Trading

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Author Info
Markus K. Brunnermeier
Lasse Heje Pedersen

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Abstract

This paper studies predatory trading: trading that induces and/or exploits other investors' need to reduce their positions. We show that if one trader needs to sell, others also sell and subsequently buy back the asset. This leads to price overshooting and a reduced liquidation value for the distressed trader. Hence, the market is illiquid when liquidity is most needed. Further, a trader profits from triggering another trader's crisis, and the crisis can spill over across traders and across markets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10755.

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Date of creation: Sep 2004
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Handle: RePEc:nbr:nberwo:10755

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G0 - Financial Economics - - General
G1 - Financial Economics - - General Financial Markets

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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.:
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Full references

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.)

  1. Stephen Morris & Hyun Song Shin, 2003. "Liquidity Black Holes," Cowles Foundation Discussion Papers 1434, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  2. Joseph Chen & Samuel Hanson & Harrison Hong & Jeremy C. Stein, 2008. "Do Hedge Funds Profit From Mutual-Fund Distress?," NBER Working Papers 13786, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Joshua D. Coval & Erik Stafford, 2005. "Asset Fire Sales (and Purchases) in Equity Markets," NBER Working Papers 11357, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Craig H. Furfine & Eli M. Remolona, 2005. "Price discovery in a market under stress: the U.S. Treasury market in fall 1998," Working Paper Series WP-05-06, Federal Reserve Bank of Chicago. [Downloadable!]
  5. James R. Thompson, 2007. "Counterparty Risk in Insurance Contracts: Should the Insured Worry about the Insurer?," Working Papers 1136, Queen's University, Department of Economics. [Downloadable!]
  6. Acharya, Viral V & Shin, Hyun Song & Yorulmazer, Tanju, 2007. "Fire Sales, Foreign Entry and Bank Liquidity," CEPR Discussion Papers 6309, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Salomonsson, Marcus, 2006. "Endogenous Noise Traders," Working Paper Series in Economics and Finance 644, Stockholm School of Economics. [Downloadable!]
  8. Schied, Alexander & Schöneborn, Torsten, 2007. "Optimal Portfolio Liquidation for CARA Investors," MPRA Paper 5075, University Library of Munich, Germany. [Downloadable!]
  9. Matthew Pritsker, 2005. "Large investors: implications for equilibrium asset, returns, shock absorption, and liquidity," Finance and Economics Discussion Series 2005-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. 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. [Downloadable!]
  11. Branko Urosevic, 2001. "Moral Hazard and Dynamics of Insider Ownership Stakes," Economics Working Papers 787, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2004. [Downloadable!]
  12. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York. [Downloadable!]
  13. Andreas Lehnert & Wayne Passmore & Shane M. Sherlund, 2006. "GSEs, mortgage rates, and secondary market activities," Finance and Economics Discussion Series 2006-30, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  14. Fang Cai, 2003. "Was there front running during the LTCM crisis," International Finance Discussion Papers 758, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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