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Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners

42 Pages Posted: 4 Jan 2005  

Franklin Allen

Imperial College London

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Jianping Mei

New York University (NYU) - Department of Finance

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Date Written: December 30, 2004

Abstract

Using a novel hand-collected data set we investigate price and trading behavior around several 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 by severe price distortions.

Keywords: limits to arbitrage, manipulation, market corner

JEL Classification: G10, G14

Suggested Citation

Allen, Franklin and Litov, Lubomir P. and Mei, Jianping, Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners (December 30, 2004). Available at SSRN: https://ssrn.com/abstract=604302 or http://dx.doi.org/10.2139/ssrn.604302

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Jianping Mei

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0354 (Phone)
212-995-4221 (Fax)

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