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Information Spillovers, Gains from Trade, and Interventions in Frozen Markets

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  • Braz Camargo
  • Kyungmin Kim
  • Benjamin Lester

Abstract

We study government interventions in markets suffering from adverse selection. Importantly, asymmetric information prevents both the realization of gains from trade and the production of information that is valuable to other market participants. We find a fundamental tension in maximizing welfare: while some intervention is required to restore trading, too much intervention depletes trade of its informational content. We characterize the optimal policy that balances these two considerations, and explore how it depends on features of the environment. Our model can be used to study a program introduced in 2009 to restore information production in the market for legacy assets. Received February 19, 2014; accepted November 20, 2015 by Editor Itay Goldstein.

Suggested Citation

  • Braz Camargo & Kyungmin Kim & Benjamin Lester, 2016. "Information Spillovers, Gains from Trade, and Interventions in Frozen Markets," The Review of Financial Studies, Society for Financial Studies, vol. 29(5), pages 1291-1329.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:5:p:1291-1329.
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    Cited by:

    1. Weiwei Gao & Ting Cao & Zhen Huang, 2021. "Do outsiders listen to insiders? The role of government support in market reactions to earnings announcements," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(4), pages 781-795, June.
    2. Yang, Xin & Wang, Xuya & Cao, Jie & Zhao, Lili & Huang, Chuangxia, 2024. "Cross-regional connectedness of financial market: Measurement and determinants," The North American Journal of Economics and Finance, Elsevier, vol. 72(C).
    3. Carré, Sylvain & Collin-Dufresne, Pierre & Gabriel, Franck, 2022. "Insider trading with penalties," Journal of Economic Theory, Elsevier, vol. 203(C).
    4. Verico, Kiki & Natanael, Yeremia, 2018. "Let’s talk about the Free Trade Agreement (FTA): The five ASEAN members highlighting Indonesia," MPRA Paper 87947, University Library of Munich, Germany.
    5. Asano, Koji, 2024. "Liquidity policies with opacity," The Quarterly Review of Economics and Finance, Elsevier, vol. 97(C).
    6. Baek, Seungjun, 2022. "Optimal policy in lemon markets with flexible information acquisition," Economic Modelling, Elsevier, vol. 106(C).
    7. Lee, Michael Junho & Neuhann, Daniel, 2023. "Collateral quality and intervention traps," Journal of Financial Economics, Elsevier, vol. 147(1), pages 159-171.
    8. Huberto M. Ennis, 2019. "Interventions in Markets with Adverse Selection: Implications for Discount Window Stigma," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(7), pages 1737-1764, October.
    9. Michael Junho Lee & Daniel Neuhann, 2019. "A Dynamic Theory of Collateral Quality and Long-Term Interventions," Staff Reports 894, Federal Reserve Bank of New York.
    10. Gábor Pintér & Chaojun Wang & Junyuan Zou, 2022. "Information chasing versus adverse selection," Bank of England working papers 971, Bank of England.
    11. Michael Lee & Daniel Neuhann, 2018. "The Incentive Channel of Capital Market Interventions," 2018 Meeting Papers 840, Society for Economic Dynamics.
    12. Kiki Verico & Yeremia Natanael, 2018. "Let’s talk about the Free Trade Agreement (FTA): The five ASEAN members highlighting Indonesia," LPEM FEBUI Working Papers 201823, LPEM, Faculty of Economics and Business, University of Indonesia, revised Jul 2018.

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