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Pricing accuracy, liquidity and trader behavior with closing price manipulation

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Abstract

We study the effects of closing price manipulation in an experimental market to evaluate the social harm caused by manipulation. We find that manipulators, given incentives similar to many actual manipulation cases, decrease price accuracy and liquidity. The mere possibility of manipulation alters market participants’ behavior, leading to reduced liquidity. We find evidence that ordinary traders attempt to profitably counteract manipulation. This study provides examples of the strategies employed by manipulators, illustrates how these strategies change in the presence of detection penalties and assesses the ability of market participants to identify manipulation.

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Authors and Affiliations

  1. Faculty of Economics and Business, University of Sydney, Sydney, NSW, 2006, Australia

    Carole Comerton-Forde

  2. Stockholm School of Economics in Riga, Strelnieku iela 4a, Riga, 1010, Latvia

    Tālis J. Putniņš

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  1. Carole Comerton-Forde
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  2. Tālis J. Putniņš
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Correspondence to Tālis J. Putniņš.

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Comerton-Forde, C., Putniņš, T.J. Pricing accuracy, liquidity and trader behavior with closing price manipulation. Exp Econ 14, 110–131 (2011). https://doi.org/10.1007/s10683-010-9259-z

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  • DOI: https://doi.org/10.1007/s10683-010-9259-z

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