Citation

Discussion Paper Details

Please find the details for DP4639 in an easy to copy and paste format below:

Full Details

Title: Predatory Trading

Author(s): Markus K Brunnermeier and Lasse Heje Pedersen

Publication Date: September 2004

Keyword(s): dealer exit stress test, liquidity, liquidity crisis, predation, risk management, systemic risk and valuation

Programme Area(s): Financial Economics

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4639

Bibliographic Reference

Brunnermeier, M and Pedersen, L. 2004. 'Predatory Trading'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4639