Strategic Trading When Central Bank Intervention Is Predictable

Uncovering hedge fund skill from the portfolio holdings they hide

Liyan Yang and Haoxiang Zhu

The Review of Asset Pricing Studies, 2021, vol. 11, issue 4, 735-761

Abstract: Market prices are noisy signals of economic fundamentals. In a two-period model, we show that if the central bank uses market prices as guidance for intervention, large strategic investors who benefit from high prices would depress market prices to induce a market-supportive intervention. Stronger anticipated interventions lead to deeper price depressions preintervention and sharper price reversals post-intervention. The central bank intervention harms strategic investors even though it is the investors who tried to mislead the central bank. The model predicts a V-shaped price pattern around central bank interventions, consistent with recent evidence. (JEL G14, G18)

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:oup:rasset:v:11:y:2021:i:4:p:735-761.

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