Title

China’s Model of Managing the Financial System

Author(s)

Markus K. Brunnermeier Markus Brunnermeier (Princeton University)

Michael Sockin Michael Sockin (University of Texas at Austin)

Wei Xiong Wei Xiong (Princeton University)

Abstract

China's economic model involves active government intervention in financial markets. We develop a theoretical framework in which interventions prevent a market breakdown and a volatility explosion caused by the reluctance of short-term investors to trade against noise traders. In the presence of information frictions, the government can alter market dynamics since the noise in its intervention program becomes an additional factor driving asset prices. More importantly, this may divert investor attention away from fundamentals and totally toward government interventions (as a result of complementarity in investors' information acquisition). A trade-off arises: government's objective to reduce asset price volatility may worsen, rather than improve, information efficiency of asset prices.

Creation Date

2020-05

Section URL ID

Paper Number

2020-45

URL

http://wxiong.mycpanel.princeton.edu/papers/ChinaTrading.pdf

File Function

Jel

G01, G14, G28

Keyword(s)

China, financial markets

Suppress

false

Series

13