Predatory Trading

Authors

  • MARKUS K. BRUNNERMEIER,

  • LASSE HEJE PEDERSEN

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    • *Brunnermeier is affiliated with Princeton University and CEPR; Pedersen is at New York University and NBER. We are grateful for helpful comments from Dilip Abreu, William Allen, Ed Altman, Yakov Amihud, Patrick Bolton, Menachem Brenner, Robert Engle, Stephen Figlewski, Gary Gorton, Rick Green, Joel Hasbrouck, Burt Malkiel, David Modest, Michael Rashes, José Scheinkman, Bill Silber, Ken Singleton, Jeremy Stein, Marti Subrahmanyam, Peter Sørensen, Nikola Tarashev, Jeff Wurgler, an anonymous referee, and seminar participants at NYU, McGill, Duke University, Carnegie Mellon University, Washington University, Ohio State University, University of Copenhagen, London School of Economics, University of Rochester, University of Chicago, UCLA, Bank of England, University of Amsterdam, Tilburg University, Wharton, Harvard University, and New York Federal Reserve Bank as well as conference participants at Stanford's SITE conference and the annual meeting of the European Finance Association. Brunnermeier acknowledges research support from the National Science Foundation.


ABSTRACT

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.

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