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Predatory Trading

  • Lasse H. Pedersen
  • Markus Brunnermeier

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 pro ts from triggering another trader's crisis, and the crisis can spill over across traders and across assets

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 425.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:425
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  1. Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers 88, Princeton, Department of Economics - Financial Research Center.
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  4. Gerard Gennotte and Hayne Leland., 1989. "Market Liquidity, Hedging and Crashes," Research Program in Finance Working Papers RPF-184, University of California at Berkeley.
  5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  6. Lynch, Anthony W & Mendenhall, Richard R, 1997. "New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index," The Journal of Business, University of Chicago Press, vol. 70(3), pages 351-83, July.
  7. Stephen Morris & Hyun Song Shin, 2003. "Liquidity Black Holes," Cowles Foundation Discussion Papers 1434, Cowles Foundation for Research in Economics, Yale University.
  8. Grossman, Sanford J, 1988. "An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies," The Journal of Business, University of Chicago Press, vol. 61(3), pages 275-98, July.
  9. Acharya, Viral V & Pedersen, Lasse Heje, 2003. "Asset Pricing with Liquidity Risk," CEPR Discussion Papers 3749, C.E.P.R. Discussion Papers.
  10. Dimitri Vayanos, 2001. "Strategic trading in a dynamic noisy market," LSE Research Online Documents on Economics 447, London School of Economics and Political Science, LSE Library.
  11. Martin D.D. Evans, H. Henry Cao, Richard K. Lyons, 2003. "Inventory Information," Working Papers gueconwpa~03-03-33, Georgetown University, Department of Economics.
  12. Markus K Brunnermeier, 2002. "Bubbles and Crashes," FMG Discussion Papers dp401, Financial Markets Group.
  13. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2000. "Does Arbitrage Flatten Demand Curves for Stocks?," Yale School of Management Working Papers ysm152, Yale School of Management, revised 01 Nov 2001.
  14. Hart, Oliver D. & Kreps, David M., 1986. "Price Destabilizing Speculation," Scholarly Articles 3448679, Harvard University Department of Economics.
  15. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
  16. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July.
  17. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
  18. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004. "Over-the-Counter Markets," NBER Working Papers 10816, National Bureau of Economic Research, Inc.
  19. 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.
  20. Zhiwu Chen & Werner Stanzl & Masahiro Watanabe, 2002. "Price Impact Costs and the Limit of Arbitrage," Yale School of Management Working Papers ysm251, Yale School of Management, revised 08 Jun 2006.
  21. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-29.
  22. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, 08.
  23. Scholes, Myron S, 1972. "The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices," The Journal of Business, University of Chicago Press, vol. 45(2), pages 179-211, April.
  24. Radner, Roy, 1980. "Collusive behavior in noncooperative epsilon-equilibria of oligopolies with long but finite lives," Journal of Economic Theory, Elsevier, vol. 22(2), pages 136-154, April.
  25. Chan, Louis K C & Lakonishok, Josef, 1995. " The Behavior of Stock Prices around Institutional Trades," Journal of Finance, American Finance Association, vol. 50(4), pages 1147-74, September.
  26. Longstaff, Francis A, 2001. "Optimal Portfolio Choice and the Valuation of Illiquid Securities," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 407-31.
  27. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
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