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When Do Circuit Breakers Stabilize Markets? Evidence and Theory

Author

Listed:
  • Tianlin Hu

    (Institute for Economic and Social Research, Jinan University, Guangdong, China)

  • Yang Ming

    (China Economics and Management Academy, Central University of Finance and Economics, Beijing, China)

Abstract

Circuit breakers, as automatic trading halt mechanisms, have ambiguous effects on stock market volatility. To identify the conditions under which such mechanisms are effective, we first examine China’s short-lived circuit breaker introduced in January 2016. Using high-frequency CSI 300 Index data and a GJR-GARCH model, we find that circuit breaker activations signifcantly increased market volatility. We then extend market microstructure models by endogenizing asset supply shocks and comparing scenarios with and without circuit breakers. The analysis shows that when shocks are relatively mild, circuit breakers help dampen volatility, whereas under severe market crises, they amplify fluctuations. These findings highlight the need for carefully calibrated trigger thresholds and complementary stabilization measures to ensure that circuit breakers fulfill their intended role in stabilizing financial markets.

Suggested Citation

  • Tianlin Hu & Yang Ming, 2025. "When Do Circuit Breakers Stabilize Markets? Evidence and Theory," Annals of Economics and Finance, Society for AEF, vol. 26(2), pages 573-613, November.
    • Handle: RePEc:cuf:journl:y:2025:v:26:i:2:humingzhu
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    References listed on IDEAS

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    JEL classification:

    • 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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