Predatory Trading

43 Pages Posted: 11 Nov 2008

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 5 versions of this paper

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

Brunnermeier, Markus Konrad and Pedersen, Lasse Heje, Predatory Trading (December 2003). NYU Working Paper No. FIN-03-042, Available at SSRN: https://ssrn.com/abstract=1299502

Markus Konrad Brunnermeier (Contact Author)

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Lasse Heje Pedersen

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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