Pricing Accuracy, Liquidity and Trader Behavior with Closing Price Manipulation
University of Melbourne - Department of Finance; Financial Research Network (FIRN)
Tālis J. Putniņš
University of Technology, Sydney - UTS Business School; Stockholm School of Economics in Riga; Financial Research Network (FIRN)
August 23, 2010
Experimental Economics, Forthcoming
We study the effects of closing price manipulation in an experimental market to evaluate the social harm caused by manipulation. We find that manipulators, given incentives similar to many actual manipulation cases, decrease price accuracy and liquidity. The mere possibility of manipulation alters market participants’ behavior, leading to reduced liquidity. We find evidence that ordinary traders attempt to profitably counteract manipulation. This study provides examples of the strategies employed by manipulators, illustrates how these strategies change in the presence of detection penalties and assesses the ability of market participants to identify manipulation.
Number of Pages in PDF File: 32
Keywords: manipulation, closing price, high-closing, experimental market
JEL Classification: G14, C90
Date posted: November 10, 2008 ; Last revised: October 12, 2010
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