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Predatory Trading

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  • Markus K. 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.

Suggested Citation

  • Markus K. Brunnermeier & Lasse Heje Pedersen, 2004. "Predatory Trading," NBER Working Papers 10755, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:10755
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    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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