Are there opportunities to make extra money when the government intervene the markets?

Abstract

In August 1998, the Hong Kong government had an unprecedented move of intervening the securities markets. We conduct ex-ante profit tests on a time-stamped transaction data set of the Hang Seng Index options and futures contracts that are traded on the Hong Kong Futures Exchange. The results show that, during the Hong Kong government intervention period, both the arbitrage profits and the standard deviations of the profits increased significantly. Thus index traders can make a greater profit during the intervention period than in a normal market condition. We argue that the higher profit is due to a breakdown of pricing dynamics among the index options, futures and the cash markets created by the government intervention. In addition, we found that, on average, the time between a trade signal and a trade is shorter during the intervention period relative to the normal period. The results indicate that professional traders can make more money at a faster pace. This result supports our conjecture that the government intervention temporarily leads to a lower pricing efficiency in Hong Kong.