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Government Intervention through Informed Trading in Financial Markets

Author

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  • Huang, Shao'an
  • Qiu, Zhigang
  • Wang, Gaowang
  • Wang, Xiaodan

Abstract

We develop a theoretical model of government intervention in which a government with private information trades strategically with other market participants to achieve its policy goal of stabilizing asset prices. When the government has precise information and cares much about its policy goal, both the government and the informed insider engage in reversed trading strategies, but they trade against each other. Government intervention can improve both market liquidity and price efficiency, and the effectiveness of government intervention depends crucially on the information quality of the government.

Suggested Citation

  • Huang, Shao'an & Qiu, Zhigang & Wang, Gaowang & Wang, Xiaodan, 2021. "Government Intervention through Informed Trading in Financial Markets," MPRA Paper 107783, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:107783
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    References listed on IDEAS

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    Cited by:

    1. Guo, Qi & Huang, Shao’an & Wang, Gaowang, 2024. "Stabilizing the financial markets through communication and informed trading," Journal of Financial Markets, Elsevier, vol. 69(C).
    2. Guo, Qi & Huang, Shao'an & Wang, Gaowang, 2022. "Stabilizing the Financial Markets through Informed Trading," MPRA Paper 115470, University Library of Munich, Germany.

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    More about this item

    Keywords

    government intervention; trading; price stability; price efficiency;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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