Working Paper: NBER ID: w10755
Authors: Markus Brunnermeier; Lasse Heje Pedersen
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.
Keywords: No keywords provided
JEL Codes: G0; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Distressed Trader's Need to Liquidate (G33) | Other Traders' Predatory Selling (D49) |
| Other Traders' Predatory Selling (D49) | Price Overshooting (D41) |
| Price Overshooting (D41) | Increased Liquidation Costs for Distressed Trader (G33) |
| Distressed Trader's Financial Difficulty (G33) | Predatory Behavior from Other Traders (G41) |
| Predatory Behavior from Other Traders (G41) | Systemic Risk in Financial Markets (E44) |