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Managing excess volatility: Design and effectiveness of circuit breakers

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  • Clapham, Benjamin
  • Gomber, Peter
  • Haferkorn, Martin
  • Panz, Sven

Abstract

We investigate different designs of circuit breakers implemented on European trading venues and examine their effectiveness to manage excess volatility and to preserve liquidity. Specifically, we empirically analyze volatility and liquidity around volatility interruptions implemented on the German and Spanish stock market which differ regarding specific design parameters. We find that volatility interruptions in general significantly decrease volatility in the post interruption phase. Unfortunately, this decrease in volatility comes at the cost of decreased liquidity. Regarding design parameters, we find tighter price ranges and shorter durations to support volatility interruptions in achieving their goals.

Suggested Citation

  • Clapham, Benjamin & Gomber, Peter & Haferkorn, Martin & Panz, Sven, 2017. "Managing excess volatility: Design and effectiveness of circuit breakers," SAFE Working Paper Series 195, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:195
    DOI: 10.2139/ssrn.2910977
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    More about this item

    Keywords

    Circuit Breaker; Volatility Interruption; Volatility; Liquidity; Market Design;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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