The Review of Asset Pricing Studies Vol. 11 No. 4 2021
Strategic Trading When Central Bank Intervention Is Predictable
open access
Abstract
Market prices are noisy signals of economic fundamentals. In a two-period model, we show that if the central bank uses market prices as guidance for intervention, large strategic investors who benefit from high prices would depress market prices to induce a market-supportive intervention. Stronger anticipated interventions lead to deeper price depressions preintervention and sharper price reversals post-intervention. The central bank intervention harms strategic investors even though it is the investors who tried to mislead the central bank. The model predicts a V-shaped price pattern around central bank interventions, consistent with recent evidence.
- DOI
- 10.1093/rapstu/raab011
- Volume
- 11
- Issue
- 4
- Pages
- 735-761
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex