DP11194 Anomalous Trading Prior to Lehman Brothers' Failure

Author(s): Thomas Gehrig, Marlene Haas
Publication Date: March 2016
Keyword(s): low latency trading, price discovery, price impact, trading volume
JEL(s): G00, G14, N00, N2
Programme Areas: Financial Economics, Economic History
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11194

We study price discovery during the liquidity freeze of September 2008, when fundamental values were difficult to be assessed. We find that trading volume and trade size significantly increased two days before the public announcement of Lehman's lethal quarter loss. Nevertheless, informational risk as perceived by liquidity suppliers increased only after the public disclosure of this loss. The price impact of trades was minimal and stock markets kept on working efficiently for Lehman stocks until the insolvency announcement. Price efficiency is on average established after half a second, which could have been exploited by low-latency traders.