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Stabilizing the Financial Markets through Communication and Informed Trading

Author

Listed:
  • Guo, Qi
  • Huang, Shao'an
  • Wang, Gaowang

Abstract

We develop a model of government intervention with information disclosure in which a government with two private signals trades directly in financial markets to stabilize asset prices. Government intervention through informed trading stabilizes financial markets and affects market quality (market liquidity and price efficiency) through a noise channel and an information channel. Information disclosure negatively affects financial stability by deteriorating the information advantages of the government, while its final effects on market quality hinge on the relative sizes of the noise effect and the information effect. Under different information disclosure scenarios, there exist potential tradeoffs between financial stability and price efficiency.

Suggested Citation

  • Guo, Qi & Huang, Shao'an & Wang, Gaowang, 2024. "Stabilizing the Financial Markets through Communication and Informed Trading," MPRA Paper 120072, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:120072
    as

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    File URL: https://mpra.ub.uni-muenchen.de/120137/1/MPRA_paper_120137.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    government intervention; information disclosure; financial stability; price efficiency; market liquidity;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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