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.