Brunnermeier, Markus K. “
Information Leakage and Market Efficiency”.
Review of Financial Studies 18 (2005): ,
18, 417-457. Print.
AbstractThis article analyzes the effects of information leakage on trading behavior and market efficiency. A trader who receives a noisy signal about a forthcoming public announcement can exploit it twice. First, when he receives it, and second, after the public announcement since he knows best the extent to which his information is already reflected in the pre-announcement price. Given his information he expects the price to overshoot and intends to partially revert his trade. While information leakage makes the price process more informative in the short-run, it reduces its informativeness in the long-run. The analysis supports Securities and Exchange Commission's Regulation Fair Disclosure.
information_leakage.pdfInformation leakage lowers market efficiency in the long run.
Brunnermeier, Markus K, and Lasse Heje Pedersen. “
Predatory Trading”.
The Journal of Finance 60 (2005): ,
60, 1825-1863. Print.
AbstractThis 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.
predatory_trading.pdf
predatory_trading_slides.pdfWhen a large trader has to liquidate, "predators" also sell and withdraw liquidity. This leads to price overshooting and systemic risk.