Predatory Trading


Brunnermeier, Markus K, and Lasse Heje Pedersen. “Predatory Trading”. The Journal of Finance 60 (2005): , 60, 1825-1863. Print.




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.


When a large trader has to liquidate, "predators" also sell and withdraw liquidity. This leads to price overshooting and systemic risk.

Awards: Barclays Global Investors Award, Smith Breeden Prize Nominee
Last updated on 07/16/2014