Critical Discussion of the Predatory-Trading-Theory from Brunnermeier/Pedersen

Seminar paper from the year 2005 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 2,0, University of Regensburg, course: Empirical Capital Market Research, language: English, abstract: What were the reasons for the great c rash of the Long-Term Capital Management (LTCM) of hedge funds in 19981? In short: predatory trading. But what is predatory in effect? How can predatory trading occur? What are the consequences of predatory trading? How can predatory trading be avoided? These questions will be answered in the following paper. The following description gives a first impression of predatory trading: "When you smell blood in the water, you become a shark. ... when you know that one of your number is in trouble ... you try to figure out what he owns and you start shorting those stocks ..."2The first part of this paper deals with the basics of the model of the predatory trading theory, the second part elaborates the advantages and disadvantages which are summed up in the last part.