Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners
University of Pennsylvania - Finance Department; European Corporate Governance Institute (ECGI)
Lubomir P. Litov
University of Arizona - Department of Finance; University of Pennsylvania - Wharton Financial Institutions Center
New York University (NYU) - Department of Finance
December 30, 2004
Using a novel hand-collected data set we investigate price and trading behavior around several well-known stock market and commodity corners which occurred between 1863 and 1980. We find strong evidence that large investors and corporate insiders possess market power that allowed them to manipulate prices. Manipulation leading to a market corner tends to increase market volatility and has an adverse price impact on other assets.
We also find that the presence of large investors makes it extremely risky for would-be short sellers to trade against the mispricing. Therefore, regulators and exchanges need to be concerned about ensuring that corners do not take place since they are accompanied by severe price distortions.
Number of Pages in PDF File: 42
Keywords: limits to arbitrage, manipulation, market corner
JEL Classification: G10, G14
Date posted: January 4, 2005
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