Abstract
The purchase of Hang Seng Index component stocks by the Hong Kong government has an immediate effect of reducing the daily trading volume for the 33 stocks involved, which, in turn, leads to a reduction in volatility in the stock market. However, once we account for the effect of a decline in trading volume, our results show that government intervention does no have additional effects on the volatility of stock returns for the majority of the Hang Seng Index component stocks. On the other hand, over a longer horizon, an increase in volatility is observed despite a decline in trading volume. Our results suggest that Hong Kong government intervention stabilises the market only in the short run through a reduction in free float in the market. However, in the long run, the effect of government intervention is less clear.
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