A Model of Financial Market Control

Yoshihiro Ohashi

Papers from arXiv.org

Abstract: This study investigates the prevention of market manipulation using a price-impact model of financial market trading as a linear system. First, I define a trading game between speculators such that they implement a manipulation trading strategy that exploits momentum traders. Second, I identify market intervention by a controller (e.g., a central bank) with a control of the system. The main result shows that there is a control strategy that prevents market manipulation as a subgame perfect equilibrium outcome of the trading game. On the equilibrium path, no intervention is realized. This study also characterizes the set of manipulation-proof linear pricing rules of the system. The set is very restrictive if there is no control, while the presence of control drastically expands the set.

Date: 2022-05
New Economics Papers: this item is included in nep-ban and nep-gth
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2205.01260

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