Pricing Accuracy, Liquidity and Trader Behavior with Closing Price Manipulation

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

Carole Comerton-Forde

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Tālis J. Putniņš

University of Technology Sydney - UTS Business School; Stockholm School of Economics in Riga; Financial Research Network (FIRN)

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 Putniņš, Tālis 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

University of Melbourne - Department of Finance ( email )

198 Berkeley Street
Carlton VIC 3010
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 Business School ( email )

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

Stockholm School of Economics in Riga ( email )

Strelnieku Iela 4a
Riga, LV1010
Latvia
+371 67015841 (Phone)

Financial Research Network (FIRN)

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

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

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