Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners
42 Pages Posted: 3 Nov 2008
Date Written: December 2004
Using a novel hand-collected data set we investigate price and trading behavior aroundseveral 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 bysevere price distortions.
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