IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/120072.html
   My bibliography  Save this paper

Stabilizing the Financial Markets through Communication and Informed Trading

Author

Listed:
  • Guo, Qi
  • Huang, Shao'an
  • Wang, Gaowang

Abstract

We develop a model of government intervention with information disclosure in which a government with two private signals trades directly in financial markets to stabilize asset prices. Government intervention through informed trading stabilizes financial markets and affects market quality (market liquidity and price efficiency) through a noise channel and an information channel. Information disclosure negatively affects financial stability by deteriorating the information advantages of the government, while its final effects on market quality hinge on the relative sizes of the noise effect and the information effect. Under different information disclosure scenarios, there exist potential tradeoffs between financial stability and price efficiency.

Suggested Citation

  • Guo, Qi & Huang, Shao'an & Wang, Gaowang, 2024. "Stabilizing the Financial Markets through Communication and Informed Trading," MPRA Paper 120072, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:120072
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/120072/1/MPRA_paper_120072.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/120137/1/MPRA_paper_120137.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Liyan Yang & Haoxiang Zhu, 2020. "Back-Running: Seeking and Hiding Fundamental Information in Order Flows," Review of Finance, European Finance Association, vol. 33(4), pages 1484-1533.
    2. Ben Charoenwong & Randall Morck & Yupana Wiwattanakantang, 2021. "Bank of Japan Equity Purchases: The (Non-)Effects of Extreme Quantitative Easing [Whatever it takes: the real effects of unconventional monetary policy]," Review of Finance, European Finance Association, vol. 25(3), pages 713-743.
    3. Pasquariello, Paolo & Roush, Jennifer & Vega, Clara, 2020. "Government Intervention and Strategic Trading in the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(1), pages 117-157, February.
    4. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    5. Philip Bond & Itay Goldstein, 2015. "Government Intervention and Information Aggregation by Prices," Journal of Finance, American Finance Association, vol. 70(6), pages 2777-2812, December.
    6. Liyan Yang & Haoxiang Zhu, 2021. "Strategic Trading When Central Bank Intervention Is Predictable [Uncovering hedge fund skill from the portfolio holdings they hide]," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 11(4), pages 735-761.
    7. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    8. Alex Edmans & Itay Goldstein & Wei Jiang, 2012. "The Real Effects of Financial Markets: The Impact of Prices on Takeovers," Journal of Finance, American Finance Association, vol. 67(3), pages 933-971, June.
    9. Mitsuru Katagiri & Koji Takahashi & Junnosuke Shino, 2022. "Bank of Japan's ETF purchase program and equity risk premium: a CAPM interpretation," BIS Working Papers 1029, Bank for International Settlements.
    10. Cong, Lin William & Grenadier, Steven R. & Hu, Yunzhi, 2020. "Dynamic interventions and informational linkages," Journal of Financial Economics, Elsevier, vol. 135(1), pages 1-15.
    11. Bian, Jiangze & Da, Zhi & He, Zhiguo & Lou, Dong & Shue, Kelly & Zhou, Hao, 2021. "Margin trading and leverage management," LSE Research Online Documents on Economics 118851, London School of Economics and Political Science, LSE Library.
    12. Huang, Shao’an & Qiu, Zhigang & Wang, Gaowang & Wang, Xiaodan, 2022. "Government intervention through informed trading in financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    13. Andrea Barbon & Virginia Gianinazzi, 2019. "Quantitative Easing and Equity Prices: Evidence from the ETF Program of the Bank of Japan," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 9(2), pages 210-255.
    14. Su, Yuli & Yip, Yewmun & Wong, Rickie W., 2002. "The impact of government intervention on stock returns: Evidence from Hong Kong," International Review of Economics & Finance, Elsevier, vol. 11(3), pages 277-297.
    15. Subrahmanyam, Avanidhar, 1994. "Circuit Breakers and Market Volatility: A Theoretical Perspective," Journal of Finance, American Finance Association, vol. 49(1), pages 237-254, March.
    16. Pasquariello, Paolo, 2007. "Informative trading or just costly noise? An analysis of Central Bank interventions," Journal of Financial Markets, Elsevier, vol. 10(2), pages 107-143, May.
    17. Louis T. W. Cheng & Joseph K. W. Fung & Kam C. Chan, 2000. "Pricing dynamics of index options and index futures in Hong Kong before and during the Asian financial crisis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(2), pages 145-166, February.
    18. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    19. Liyan Yang & Haoxiang Zhu, 2020. "Back-Running: Seeking and Hiding Fundamental Information in Order Flows," The Review of Financial Studies, Society for Financial Studies, vol. 33(4), pages 1484-1533.
    20. Andrea Barbon & Virginia Gianinazzi, 2019. "Quantitative Easing and Equity Prices: Evidence from the ETF Program of the Bank of Japan," Swiss Finance Institute Research Paper Series 19-55, Swiss Finance Institute.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guo, Qi & Huang, Shao'an & Wang, Gaowang, 2022. "Stabilizing the Financial Markets through Informed Trading," MPRA Paper 115470, University Library of Munich, Germany.
    2. Huang, Shao’an & Qiu, Zhigang & Wang, Gaowang & Wang, Xiaodan, 2022. "Government intervention through informed trading in financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    3. Jasmin Gider & Simon N. M. Schmickler & Christian Westheide, 2021. "High-Frequency Trading and Price Informativeness," CRC TR 224 Discussion Paper Series crctr224_2021_257, University of Bonn and University of Mannheim, Germany.
    4. Goldstein, Itay & Yang, Liyan, 2019. "Good disclosure, bad disclosure," Journal of Financial Economics, Elsevier, vol. 131(1), pages 118-138.
    5. Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.
    6. Toni Ahnert & Caio Machado & Ana Elisa Pereira, 2020. "Trading for Bailouts," Staff Working Papers 20-23, Bank of Canada.
    7. Aliyev, Nihad & Huseynov, Fariz & Rzayev, Khaladdin, 2022. "Algorithmic trading and investment-to-price sensitivity," LSE Research Online Documents on Economics 118844, London School of Economics and Political Science, LSE Library.
    8. Alessio Piccolo & Joel Shapiro, 2022. "Credit Ratings and Market Information," The Review of Financial Studies, Society for Financial Studies, vol. 35(10), pages 4425-4473.
    9. Ye, Mao & Zheng, Miles Y. & Zhu, Wei, 2023. "The effect of tick size on managerial learning from stock prices," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    10. Caio Machado & Ana Elisa Pereira, 2020. "Competing for Stock Market Feedback," Documentos de Trabajo 545, Instituto de Economia. Pontificia Universidad Católica de Chile..
    11. Rösch, Dominik M. & Subrahmanyam, Avanidhar & van Dijk, Mathijs A., 2022. "Investor short-termism and real investment," Journal of Financial Markets, Elsevier, vol. 59(PB).
    12. Caio Machado & Ana Elisa Pereira, 2019. "Optimal Investment and Capital Structure with Stock Market Feedback," Documentos de Trabajo 527, Instituto de Economia. Pontificia Universidad Católica de Chile..
    13. Jin, Ling & Li, Zhisheng & Lu, Lei & Ni, Xiaoran, 2023. "Does stock market rescue affect investment efficiency in the real sector?," Journal of Financial Markets, Elsevier, vol. 65(C).
    14. Caio Machado & Ana Elisa Pereira, 2023. "Optimal Capital Structure with Stock Market Feedback," Review of Finance, European Finance Association, vol. 27(4), pages 1329-1371.
    15. Xiong, Yan & Yang, Liyan, 2021. "Disclosure, competition, and learning from asset prices," Journal of Economic Theory, Elsevier, vol. 197(C).
    16. Sagade, Satchit & Scharnowski, Stefan & Westheide, Christian, 2022. "Broker colocation and the execution costs of customer and proprietary orders," SAFE Working Paper Series 366, Leibniz Institute for Financial Research SAFE.
    17. Attig, Najah & El Ghoul, Sadok, 2021. "Flying under the radar: The real effects of anonymous trading," Journal of Corporate Finance, Elsevier, vol. 71(C).
    18. Asriyan, Vladimir & Fuchs, William & Green, Brett, 2021. "Aggregation and design of information in asset markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 191(C).
    19. Bennett, Benjamin & Stulz, René & Wang, Zexi, 2020. "Does the stock market make firms more productive?," Journal of Financial Economics, Elsevier, vol. 136(2), pages 281-306.
    20. Jonathan Brogaard & Jing Pan, 2022. "Dark Pool Trading and Information Acquisition," The Review of Financial Studies, Society for Financial Studies, vol. 35(5), pages 2625-2666.

    More about this item

    Keywords

    government intervention; information disclosure; financial stability; price efficiency; market liquidity;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:120072. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.