China’s Model of Managing the Financial System

Markus Brunnermeier, Michael Sockin and Wei Xiong
Additional contact information
Michael Sockin: University of Texas at Austin
Wei Xiong: Princeton University

Working Papers from Princeton University. Economics Department.

Abstract: China's economic model involves active government intervention in financial markets. We develop a theoretical framework in which interventions prevent a market breakdown and a volatility explosion caused by the reluctance of short-term investors to trade against noise traders. In the presence of information frictions, the government can alter market dynamics since the noise in its intervention program becomes an additional factor driving asset prices. More importantly, this may divert investor attention away from fundamentals and totally toward government interventions (as a result of complementarity in investors' information acquisition). A trade-off arises: government's objective to reduce asset price volatility may worsen, rather than improve, information efficiency of asset prices.

Keywords: China; financial markets (search for similar items in EconPapers)
JEL-codes: G01 G14 G28 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-cna, nep-fdg, nep-ifn and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://wxiong.mycpanel.princeton.edu/papers/ChinaTrading.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2020-45

Access Statistics for this paper

More papers in Working Papers from Princeton University. Economics Department. Contact information at EDIRC.
Bibliographic data for series maintained by Bobray Bordelon ().