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Stock Market Manipulation in the Presence of Fund Flows

  • Xiangbo Liu

    (Hanqing Advanced Institute of Economics and Finance and School of Economics, Renmin University of China)

  • Zijun Liu

    (London School of Economics)

  • Zhigang Qiu

    (Hanqing Advanced Institute of Economics and Finance and School of Economics, Renmin University of China)

We study the manipulation of stock market prices by fund managers in the presence of potential future fund flows. As investors will make further investment as long as the asset price is not fully revealing, the informed manager has incentives to prevent the asset value to be revealed too early, in order to maximise the size of fund flows. Hence in the early trading round, the informed manager always buys the asset even when it is overpriced based on her private information, and the uninformed manager follows suit. Subsequently, the informed manager trades based her private information, and the uninformed one trades based on a mixed strategy. The investors' decisions to invest arise endogenously within the model.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 14 (2013)
Issue (Month): 2 (November)
Pages: 483-491

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Handle: RePEc:cuf:journl:y:2013:v:14:i:2:liu:liu:qiu
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  1. John, Kose & Narayanan, Ranga, 1997. "Market Manipulation and the Role of Insider Trading Regulations," The Journal of Business, University of Chicago Press, vol. 70(2), pages 217-47, April.
  2. Dow, James & Gorton, Gary, 1997. "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1024-50, October.
  3. Allen, Franklin & Gorton, Gary, 1993. "Churning Bubbles," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 813-36, October.
  4. Prat, Andrea & Dasgupta, Amil, 2006. "Financial equilibrium with career concerns," Theoretical Economics, Econometric Society, vol. 1(1), pages 67-93, March.
  5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  6. Fishman, Michael J & Hagerty, Kathleen M, 1995. "The Mandatory Disclosure of Trades and Market Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 637-76.
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