Predatory Trading

36 Pages Posted: 22 Apr 2003

See all articles by Lasse Heje Pedersen

Lasse Heje Pedersen

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

Markus K. Brunnermeier

Princeton University - Department of Economics

Multiple version iconThere are 5 versions of this paper

Date Written: February 20, 2003

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 assets.

Suggested Citation

Pedersen, Lasse Heje and Brunnermeier, Markus Konrad, Predatory Trading (February 20, 2003). Available at SSRN: https://ssrn.com/abstract=386120 or http://dx.doi.org/10.2139/ssrn.386120

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

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

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