Pricing Accuracy, Liquidity and Trader Behavior with Closing Price Manipulation
32 Pages Posted: 10 Nov 2008 Last revised: 12 Oct 2010
Date Written: August 23, 2010
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: Suggested Citation