Anatomy of a Government Intervention in Index Stocks: Price Pressure or Information Effects?*

Abstract

In a massive intervention designed to deter speculators, the Hong Kong Monetary Authority (HKMA) bought Hang Seng index stocks in August 1998. These stocks experienced a 24% abnormal return during the intervention period. The abnormal returns are not reversed over the next eight weeks, refuting the hypothesis that returns are due to temporary liquidity effects. Cross‐sectional analysis of daily abnormal returns during the intervention period reveals that these returns are related to overall intervention activity rather than stock‐specific intervention. This evidence is consistent with information effects rather than price pressure effects.