Strategic Trading When Central Bank Intervention Is Predictable
Keyword(s):
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. (JEL G14, G18)
2017 ◽
2001 ◽
Vol 20
(5)
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pp. 589-590
1992 ◽
Vol 6
(4)
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pp. 119-144
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