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Predators and Prey on Wall Street

Maria Chaderina and Richard Green

Review of Asset Pricing Studies, 2014, vol. 4, issue 1, 1-38

Abstract: Much financial activity is zero-sum. While providing transactional and diversification services to others, participants also prey upon each other. High-ability predators trade opportunistically with less-able prey. In our dynamic model these features amplify real shocks. The presence of more low-ability traders reduces expected losses to high-ability traders, leading to equilibria with high levels of financial activity and employment. Shocks to profits can motivate exit by low-ability traders, rendering those of intermediate skill more vulnerable. Thus, our relatively simple model generates boom-bust dynamics suggestive of Wall Street.

JEL-codes: G00 G20 E44 (search for similar items in EconPapers)
Date: 2014
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