Large investors, price manipulation, and limits to arbitrage: An anatomy of market corners

Franklin Allen, Lubomir P Litov, Jianping Mei

Research output: Contribution to journalArticle

38 Citations (Scopus)

Abstract

Corners were prevalent in the nineteenth and early twentieth century. We first develop a rational expectations model of corners and show that they can arise as the result of rational behavior. Then, using a novel hand-collected data set, we investigate price and trading behavior around several well-known stock market and commodity corners which occurred between 1863 and 1980. We find strong evidence that large investors and corporate insiders possess market power that allows them to manipulate prices. Manipulation leading to a market corner tends to increase market volatility and has an adverse price impact on other assets. We also find that the presence of large investors makes it risky for would-be short sellers to trade against the mispricing. Therefore, regulators and exchanges need to be concerned about ensuring that corners do not take place since they are accompanied by severe price distortions.

Original languageEnglish (US)
Pages (from-to)645-693
Number of pages49
JournalReview of Finance
Volume10
Issue number4
DOIs
StatePublished - Dec 2006
Externally publishedYes

Fingerprint

Investors
Price limits
Price manipulation
Limits to arbitrage
Price impact
Manipulation
Rational behavior
Insider
Trading behavior
Stock market
Market power
Assets
Rational expectations models
Seller
Market volatility
Mispricing
Price distortions
Commodities
20th century

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

Cite this

Large investors, price manipulation, and limits to arbitrage : An anatomy of market corners. / Allen, Franklin; Litov, Lubomir P; Mei, Jianping.

In: Review of Finance, Vol. 10, No. 4, 12.2006, p. 645-693.

Research output: Contribution to journalArticle

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