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Predatory TradingLasse Heje PedersenNew York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER) Markus K. BrunnermeierPrinceton University - Department of Economics September 2004 NBER Working Paper No. w10755 Abstract: 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.
Number of Pages in PDF File: 56 working papers seriesDate posted: September 27, 2004Suggested CitationContact Information
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