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Government intervention and information aggregation by prices

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  • Itay Goldstein

    (University of Pennsylvania)

  • Philip Bond

    (University of Minnesota)

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    Abstract

    Market prices are thought to contain a lot of useful information. Hence, government regulators (and other economic agents) are often urged to use market prices to guide decisions. An important issue to consider is the endogeneity of market prices and how they are affected by the prospect of government intervention. We show that if the government learns from the price when taking a corrective action, it might reduce the incentives of speculators to trade on their information, and hence reduce price informativeness. We show that transparency may reduce trading incentives and price informativeness further. Diametrically opposite implications hold for the alternative case in which the government's action amplifies the effect of underlying fundamentals. We derive implications for the optimal use of market information and for the government's incentives to produce its own information

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 225.

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    Date of creation: 2012
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    Handle: RePEc:red:sed012:225

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    1. Philip Bond & Hulya Eraslan, 2007. "Information-based trade," Levine's Bibliography 122247000000001689, UCLA Department of Economics.
    2. Krainer, John & Lopez, Jose A, 2004. "Incorporating Equity Market Information into Supervisory Monitoring Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1043-67, December.
    3. Faure-Grimaud, Antoine, 2002. "Using Stock Price Information to Regulate Firms," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 169-90, January.
    4. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-57, May.
    5. Philip Bond & Itay Goldstein & Edward Simpson Prescott, 2010. "Market-Based Corrective Actions," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 781-820, February.
    6. Jayant Vivek Ganguli & Liyan Yang, 2009. "Complementarities, Multiplicity, and Supply Information," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 90-115, 03.
    7. Reny, P.J. & Bhattacharya, U. & Spiegel, M., 1993. "Destructive Interference in an Imperfectly Competitive Multi-Security Market," UWO Department of Economics Working Papers 9318, University of Western Ontario, Department of Economics.
    8. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    9. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 311-344, April.
    10. Itay Goldstein & Alexander Guembel, 2008. "Manipulation and the Allocational Role of Prices," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 133-164.
    11. Khanna, Naveen & Slezak, Steve L & Bradley, Michael, 1994. "Insider Trading, Outside Search, and Resource Allocation: Why Firms and Society May Disagree on Insider Trading Restrictions," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 575-608.
    12. Foucault, Thierry & Gehrig, Thomas, 2008. "Stock price informativeness, cross-listings, and investment decisions," Journal of Financial Economics, Elsevier, vol. 88(1), pages 146-168, April.
    13. Hayne E. Leland., 1990. "Insider Trading: Should It Be Prohibited?," Research Program in Finance Working Papers RPF-195, University of California at Berkeley.
    14. Herring, Richard J., 2004. "The subordinated debt alternative to Basel II," Journal of Financial Stability, Elsevier, vol. 1(2), pages 137-155, December.
    15. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
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    Cited by:
    1. Liyan Yang & Itay Goldstein, 2014. "Good Disclosure, Bad Disclosure," 2014 Meeting Papers 42, Society for Economic Dynamics.

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