Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments October 2005 erstellt
Beschreibung:
We investigate the impact of an arbitrageur's activities in an illiquid market, where there is a large distressed trader and a fringe of small traders. Large traders trade strategically considering price impacts of their trades and future uncertainty on market liquidity. Prices are determined endogenously through a dynamic bargaining and trading process. We find that large traders' equilibrium strategies vary with their relative bargaining powers and uncertainty on market liquidity. In most cases, the arbitrageur front-runs the distressed trader's trades by selling quickly and rebuilding her position later at a lower price. The depressed trader's optimal response is to liquidate quickly despite a big price depression. However, the arbitrageur does not front-run when there is little uncertainty of market liquidity, or market liquidity improves over time. The depressed seller then can trade quickly without disturbing prices too much