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Predatory Trading

Markus Brunnermeier () and Lasse Pedersen

No 4639, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: dealer exit stress test; liquidity; liquidity crisis; predation; risk management; systemic risk; valuation (search for similar items in EconPapers)
JEL-codes: G10 G12 G23 G24 (search for similar items in EconPapers)
Date: 2004-09
New Economics Papers: this item is included in nep-fin and nep-fmk
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Related works:
Journal Article: Predatory Trading (2005) Downloads
Working Paper: Predatory Trading (2004) Downloads
Working Paper: Predatory Trading (2004) Downloads
Working Paper: Predatory trading (2003) Downloads
Working Paper: Predatory Trading (2003) Downloads
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