Stabilizing the Financial Markets through Communication and Informed Trading

Qi Guo, Shao'an Huang and Gaowang Wang

MPRA Paper from University Library of Munich, Germany

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.

Keywords: government intervention; information disclosure; financial stability; price efficiency; market liquidity (search for similar items in EconPapers)
JEL-codes: D8 G1 (search for similar items in EconPapers)
Date: 2024-02-08
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-gth and nep-mst
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https://mpra.ub.uni-muenchen.de/120072/1/MPRA_paper_120072.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/120137/1/MPRA_paper_120137.pdf revised version (application/pdf)

Related works:
Journal Article: Stabilizing the financial markets through communication and informed trading (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:120072

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