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Predatory Trading

  • Brunnermeier, Markus K
  • Pedersen, Lasse Heje

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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4639.

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Date of creation: Sep 2004
Date of revision:
Handle: RePEc:cpr:ceprdp:4639
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