Pricing Accuracy, Liquidity and Trader Behavior with Closing Price Manipulation

32 Pages Posted: 10 Nov 2008 Last revised: 12 Oct 2010

See all articles by Carole Comerton-Forde

Carole Comerton-Forde

UNSW Business School; Financial Research Network (FIRN)

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Date Written: August 23, 2010

Abstract

We study the effects of closing price manipulation in an experimental market to evaluate the social harm caused by manipulation. We find that manipulators, given incentives similar to many actual manipulation cases, decrease price accuracy and liquidity. The mere possibility of manipulation alters market participants’ behavior, leading to reduced liquidity. We find evidence that ordinary traders attempt to profitably counteract manipulation. This study provides examples of the strategies employed by manipulators, illustrates how these strategies change in the presence of detection penalties and assesses the ability of market participants to identify manipulation.

Keywords: manipulation, closing price, high-closing, experimental market

JEL Classification: G14, C90

Suggested Citation

Comerton-Forde, Carole and Putnins, Talis J., Pricing Accuracy, Liquidity and Trader Behavior with Closing Price Manipulation (August 23, 2010). Experimental Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1296857 or http://dx.doi.org/10.2139/ssrn.1296857

Carole Comerton-Forde

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

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