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Dynamic Runs and Circuit Breakers: An Experiment

Author

Listed:
  • Jacopo Magnani
  • David Munro

    (Division of Social Science)

Abstract

Although now widespread in financial markets, circuit breakers remain controversial among researchers and professional investors. We formalize the popular argument that circuit breakers provide a "cooling-off" period for investors during market runs and we test it in the laboratory. Our experiment reproduces a market where investors fear future liquidity shocks but receive news about the true state over time. Notably, we find that when information quality is poor circuit breakers can have perverse effects on trading behavior. However, when information quality is high, circuit breakers can improve welfare by providing agents with time to learn about the true state, when private incentives to wait for more information are insuffcient.

Suggested Citation

  • Jacopo Magnani & David Munro, 2018. "Dynamic Runs and Circuit Breakers: An Experiment," Working Papers 20180018, New York University Abu Dhabi, Department of Social Science, revised May 2018.
    • Handle: RePEc:nad:wpaper:20180018
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    References listed on IDEAS

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    Cited by:

    1. Hubert J. Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2022. "Experimental bank runs," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 25, pages 347-361, Edward Elgar Publishing.
      • Hubert J. Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2021. "Experimental Bank Runs," ThE Papers 21/03, Department of Economic Theory and Economic History of the University of Granada..
    2. Choi, Jae Hoon & Munro, David, 2022. "Market liquidity and excess volatility: Theory and experiment," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    3. Chernulich, Aleksei & Horowitz, John & Rabanal, Jean Paul & Rud, Olga A & Sharifova , Manizha, 2021. "Entry and exit decisions under public and private information: An experiment," UiS Working Papers in Economics and Finance 2021/3, University of Stavanger.
    4. Aleksei Chernulich & John Horowitz & Jean Paul Rabanal & Olga Rud & Manizha Sharifova, 2023. "Entry and exit decisions under public and private information: an experiment," Experimental Economics, Springer;Economic Science Association, vol. 26(2), pages 339-356, April.

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    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises

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