Predatory Trading
43 Pages Posted: 11 Nov 2008
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Predatory Trading
Predatory Trading
Date Written: December 2003
Abstract
This paper studies predatory trading: trading that induces and/or exploits other investors s 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.
Keywords: Predation, Valuation, Liquidity, Risk Management, Systemic Risk
Suggested Citation: Suggested Citation
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