Article first published online: 12 AUG 2005
The Journal of Finance
Volume 60, Issue 4, pages 1825–1863, August 2005
How to Cite
BRUNNERMEIER, M. K. and PEDERSEN, L. H. (2005), Predatory Trading. The Journal of Finance, 60: 1825–1863. doi: 10.1111/j.1540-6261.2005.00781.x
- Issue published online: 12 AUG 2005
- Article first published online: 12 AUG 2005
This paper studies predatory trading, trading that induces and/or exploits the need of other investors 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.