Was There Front Running During the Ltcm Crisis?

Was at that place Front cart track During the LTCM Crisis NOTE: multinational pay sermon Papers ar preliminary materials circulated to steady discussion and slender comment. References in publications to International Finance Discussion Papers (other than an acknowledgment that the source has had access to unpublished material) should be cleared with the author or authors. novel IFDPs are ready(prenominal) on the Web at www.federalreserve.gov/pubs/ifdp/. Was There Front Running During the LTCM Crisis? Fang Cai* Abstract: This paper uses a uncommon dataset of audit atomic number 82 transactions to examine the calling port of commercialise makers in the Treasury bond futures market place when Long-Term smashing Management (LTCM) faced binding margin constraints in 1998. Although identi eviscerates are secret in the dataset, I find strong take up that during the crisis market makers in the inwardness engaged in motion trial against customer narrates fr om a particular clearing immobile (coded PI7) that closely couplet various features of LTCMs trades through house Stearns. That is, market makers traded on their cause accounts in the same command as PI7 customers did, but one or two transactions aheadhand. Furthermore, a significant percentage of market makers made incorrect profits on most of the trading age during the crisis.

Their aggregate abnormal profits, however, were more than offset by abnormal losings realized after the private sector recapitalization of LTCM. Moreover, I show that before the rescue, a market makers accumulative abnormal pro fit was positively correlated both to her ti! e as contra troupe with PI7 and to the intensity of her move running, but these relationships saturnine negative after the rescue. The boilers suit evidence suggests that the recapitalization plan effectively relaxed LTCMs binding constraints and therefore converse the profitability of front running. Keywords: front running, strategic trading, market microstructure, trading behavior, margin constraints,...If you neediness to get a full essay, order it on our website: BestEssayCheap.com

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