Template-type: ReDIF-Paper 1.0
Author-Name: Chia-Lin Chang
Author-Workplace-Name: Department of Applied Economics and Department of Finance, National Chung Hsing University, Taiwan and Department of Finance, Asia 
	University, Taiwan.
Author-Name: Jukka Ilomäki
Author-Workplace-Name: Faculty of Management and Business, Tampere University, Finland.
Author-Name: Hannu Laurila
Author-Workplace-Name: Faculty of Management and Business, Tampere University, Finland.
Author-Name:
 Michael McAleer
Author-Workplace-Name:
 Department of Quantitative Finance National Tsing Hua University, Taiwan and Econometric Institute Erasmus School of 
	Economics Erasmus University Rotterdam, The Netherlands and Department of Quantitative Economics Complutense University of 
	Madrid, Spain And Institute of Advanced Sciences Yokohama National University, Japan.
Title: Central Bank Intervention, Bubbles and Risk in Walrasian Financial Markets
Abstract: The paper investigates the effects of central bank interventions in financial markets, composed of asymmetrically-informed rational investors and 
	noise traders. If the central bank suspects a bubble, it should lift the real risk-free rate to deflate the bubble in “leaning against the wind”. A 
	rise in the real risk-free rate reduces the risk of rational informed investors, and increases the risk of rational uninformed investors. If the 
	central bank intervenes through the nominal risk-free rate and the Fisher arbitrage condition holds, an increase in the nominal rate is transferred to 
	inflation, thereby dampening the policy effect. Conversely, this implies that the central bank can also deflate the bubble by inducing a reduction in 
	inflationary expectations. The effect on the informed investor risk remains ambiguous, while the risk of he uninformed investor grows, but only if they 
	suffer from money illusion.
Classification-JEL: D82, E52, G11, G14, G32.
Keywords: Central bank intervention, Asymmetric information, Rational investors, Noise traders, Bubbles, Risk-free rate, Fisherian arbitrage, Inflation, 
	Expectations, Money illusion.
Length: 19 pages 
Creation-Date: 2019-03
Number: 2019-07
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae1907.txt
File-URL: https://eprints.ucm.es/id/eprint/54766/1/1907.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doicae:1907