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The Working Of Circuit Breakers Within Percolation Models For Financial Markets

Author

Listed:
  • GUDRUN EHRENSTEIN

    (Institute for Theoretical Physics, Cologne University, Zülpicherstraße 77, D-50937 Köln, Germany)

  • FRANK WESTERHOFF

    (Department of Economics, University of Osnabrück, Rolandstraße 8, D-49069 Osnabrück, Germany)

Abstract

We use a modified Cont–Bouchaud model to explore the effectiveness of trading breaks. The modifications include that the trading activity of the market participants depends positively on historical volatility and that the orders of the agents are conditioned on the observed mispricing. Trading breaks, also called circuit breakers, interrupt the trading process when prices are about to exceed a pre-specified limit. We find that trading breaks are a useful instrument to stabilize financial markets. In particular, trading breaks may reduce price volatility and deviations from fundamentals.

Suggested Citation

  • Gudrun Ehrenstein & Frank Westerhoff, 2006. "The Working Of Circuit Breakers Within Percolation Models For Financial Markets," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 17(02), pages 299-304.
    • Handle: RePEc:wsi:ijmpcx:v:17:y:2006:i:02:n:s0129183106009035
    DOI: 10.1142/S0129183106009035
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    Cited by:

    1. Imtiaz Mohammad Sifat & Azhar Mohamad, 2019. "Circuit breakers as market stability levers: A survey of research, praxis, and challenges," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 1130-1169, July.
    2. Gao-Feng Gu & Xiong Xiong & Hai-Chuan Xu & Wei Zhang & Yongjie Zhang & Wei Chen & Wei-Xing Zhou, 2021. "An empirical behavioral order-driven model with price limit rules," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-24, December.

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