The impact of government intervention on stock returns: Evidence from Hong Kong

In August 1998, the Hong Kong government, in her effort to restore investors' confidence, purchased shares of the 33 stocks that constitute the Hang Seng Index (HS). We find that the government's action not only reverses the declining trend of the stock market but also reduces the volatility of the market. The main beneficiaries of the action are the shareholders of the stocks that are purchased by the government during the intervention period, and the increase in stock prices persists. Although the shareholders of non-Hang Seng stocks also gain from the intervention, their gain is smaller and does not last.