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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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    • Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2005. "Over-the-Counter Markets," Econometrica, Econometric Society, vol. 73(6), pages 1815-1847, November. [Downloadable!] (restricted)
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