56 Pages Posted: 27 Sep 2004
Date Written: September 2004
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 markets.
Suggested Citation: Suggested Citation
Pedersen, Lasse Heje and Brunnermeier, Markus K., Predatory Trading (September 2004). NBER Working Paper No. w10755. Available at SSRN: https://ssrn.com/abstract=590767