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Circuit Breakers and Market Volatility: A Theoretical Perspective

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Author Info
 Subrahmanyam, Avanidhar
Abstract

This paper examines ex ante effects of 'circuit breakers' (mandated trading halts). The author shows that circuit breakers, by causing agents to suboptimally advance trades in time, may have the perverse effect of increasing price variability and exacerbating price movements. He next considers a situation in which a circuit breaker causes trading to be halted in both a 'dominant' (more liquid) and a 'satellite' market. As agents switch from the dominant market to the satellite market, price variability and market liquidity decline on the dominant market and increase on the satellite market. Copyright 1994 by American Finance Association.

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

Volume (Year): 49 (1994)
Issue (Month): 1 (March)
Pages: 237-54
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Handle: RePEc:bla:jfinan:v:49:y:1994:i:1:p:237-54

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  1. Anthony D. Hall & Paul Kofman & Steve Manaster, 2001. "Migration of Price Discovery With Constrained Futures Markets," Research Paper Series 70, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  2. Lucy F. Ackert & Bryan K. Church & Narayanan Jayaraman, 1999. "An experimental study of circuit breakers: the effects of mandated market closures and temporary halts on market behavior," Working Paper 99-1, Federal Reserve Bank of Atlanta. [Downloadable!]
  3. Asani Sarkar & Robert A. Schwartz, 2006. "Two-sided markets and intertemporal trade clustering: insights into trading motives," Staff Reports 246, Federal Reserve Bank of New York. [Downloadable!]
  4. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2005. "The joint dynamics of liquidity, returns, and volatility across small and large firms," Staff Reports 207, Federal Reserve Bank of New York. [Downloadable!]
  5. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2003. "An empirical analysis of stock and bond market liquidity," Staff Reports 164, Federal Reserve Bank of New York. [Downloadable!]
  6. Michael A. Goldstein & Kenneth A. Kavajecz, . "Liquidity Provision during Circuit Breakers and Extreme Market Movements," Rodney L. White Center for Financial Research Working Papers 1-00, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
    Other versions:
  7. Anolli, Mario & Petrella, Giovanni, 2007. "A Two-Stage Non Discretionary Trading Suspension Mechanism: Effects on Market Quality," MPRA Paper 7931, University Library of Munich, Germany. [Downloadable!]
  8. Yan Du & Qianqiu Liu & S. Ghon Rhee, 2006. "An Anatomy of the Magnet Effect: Evidence from the Korea Stock Exchange High-Frequency Data," CEI Working Paper Series 2005-17, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  9. Rocha, Marco Aurélio dos Santos & Fernandes, Marcelo, 2006. "Are price limits on futures markets that cool? Evidence from the Brazilian Mercantile and Futures Exchange," Economics Working Papers (Ensaios Economicos da EPGE) 630, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
    Other versions:
  10. Anthony D. Hall & Paul Kofman & R. Guido, 1998. "Limits to Linear Price Behaviour: Target Zones for Futures Prices Regulated By Limits," Research Paper Series 3, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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