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Trading for Bailouts

Author

Listed:
  • Toni Ahnert
  • Caio Machado
  • Ana Elisa Pereira

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.

Suggested Citation

  • Toni Ahnert & Caio Machado & Ana Elisa Pereira, 2020. "Trading for Bailouts," Staff Working Papers 20-23, Bank of Canada.
    • Handle: RePEc:bca:bocawp:20-23
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial institutions; Financial markets; Financial system regulation and policies; Lender of last resort;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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