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Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners
Franklin Allen University of Pennsylvania - Finance Department; European Corporate Governance Institute (ECGI) Lubomir P. Litov Washington University, St. Louis - John M. Olin School of Business; Financial Institutions Center, Wharton School, University of Pennsylvania Jianping Mei New York University - Department of Finance December 30, 2004 Abstract: 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.
Keywords: limits to arbitrage, manipulation, market corner JEL Classifications: G10, G14 Working Paper SeriesDate posted: January 04, 2005 ; Last revised: May 04, 2008Suggested CitationContact Information
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