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Stock Market Crashes and the Performance of Circuit Breakers: Empirical Evidence

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  • Lauterbach, Beni
  • Ben-Zion, Uri
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    Abstract

    This study examines the behavior of a small stock market with circuit breakers and with a one-hour preauction order imbalance disclosure during the October 1987 crash. The crash and its aftershocks lasted for a week and selling pressure was concentrated in higher beta, larger capitalization, and lower leverage firm stocks. Circuit breakers when implemented reduced the next-day opening order imbalance and the initial price loss; however, they had no effect on the long-run response. Some price overreaction and reversal phenomena also are documented. Copyright 1993 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 48 (1993)
    Issue (Month): 5 (December)
    Pages: 1909-25

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    Handle: RePEc:bla:jfinan:v:48:y:1993:i:5:p:1909-25

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    Cited by:
    1. Wei, K. C. John & Chiang, Raymond, 2004. "A GMM approach for estimation of volatility and regression models when daily prices are subject to price limits," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 12(4), pages 445-461, September.
    2. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2008. "Liquidity and market efficiency," Journal of Financial Economics, Elsevier, Elsevier, vol. 87(2), pages 249-268, February.
    3. Wang, Dingyan & Chong, Terence Tai-Leung & Chan, Wing Hong, 2014. "Price Limits and Stock Market Volatility in China," MPRA Paper 54146, University Library of Munich, Germany.
    4. M. Ausloos & K. Ivanova & N. Vandewalle, 2001. "Crashes : symptoms, diagnoses and remedies," Papers cond-mat/0104127, arXiv.org, revised Apr 2001.
    5. Farag, Hisham, 2013. "Price limit bands, asymmetric volatility and stock market anomalies: Evidence from emerging markets," Global Finance Journal, Elsevier, vol. 24(1), pages 85-97.
    6. Veld-Merkoulova, Yulia V., 2003. "Price limits in futures markets: effects on the price discovery process and volatility," International Review of Financial Analysis, Elsevier, vol. 12(3), pages 311-328.
    7. Sarah Draus & Mark van Achter, 2012. "Circuit Breakers and Market Runs," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 313, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    8. Hsieh, Ping-Hung & Kim, Yong H. & Yang, J. Jimmy, 2009. "The magnet effect of price limits: A logit approach," Journal of Empirical Finance, Elsevier, Elsevier, vol. 16(5), pages 830-837, December.
    9. Li, Mingsheng & McCormick, Timothy & Zhao, Xin, 2005. "Order imbalance and liquidity supply: Evidence from the bubble burst of Nasdaq stocks," Journal of Empirical Finance, Elsevier, Elsevier, vol. 12(4), pages 533-555, September.
    10. James Brugler & Oliver Linton, 2014. "Single stock circuit breakers on the London Stock Exchange: do they improve subsequent market quality?," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP07/14, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.

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