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Trading for Bailouts

Toni Ahnert (), Caio Machado () and Ana Elisa Pereira ()

Staff Working Papers from Bank of Canada

Abstract: Government interventions such as bailouts are often implemented in times of high uncertainty. Policymakers may therefore rely on information from financial markets to guide their decisions. We propose a model in which a policymaker learns from market activity and where market participants have high stakes in the intervention. We study how the strategic behavior of informed traders affects market informativeness, the probability and efficiency of bailouts, and stock prices. We apply the model to study the liquidity support of distressed banks and derive implications for market informativeness and policy design. Commitment to a minimum liquidity support can increase market informativeness and welfare.

Keywords: Financial institutions; Financial markets; Financial system regulation and policies; Lender of last resort (search for similar items in EconPapers)
JEL-codes: D83 G18 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2020-06
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:20-23

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