Managing China's Stock Markets: The Economics of the National Team
66 Pages Posted: 27 Mar 2020 Last revised: 6 Apr 2022
Date Written: April 5, 2022
We exploit China's great stock market crash in 2015 to study the effects of government stock purchases. The Chinese government purchased stocks to stabilize the market through state-owned financial institutions collectively called the "National Team". We find that the intervention led to reduced trading volume, volatility, and price informativeness. These impacts mainly come from the disclosure of the government portfolio. These results are consistent with limited attention myopic investors acquiring government intervention information instead of fundamental news, leading to homogenized beliefs and reduced information production. The paper suggests some fundamental trade-offs facing government purchase of stocks in a second-best world.
Keywords: Direct government intervention, financial crises, financial markets
JEL Classification: G12; G14; G18
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