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A Microstructure Study of Circuit Breakers in the Chinese Stock Markets

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  • Steven Shuye Wang

    (School of Business, Renmin University of China)

  • Kuan Xu

    (Department of Economics, Dalhousie University)

  • Hao Zhang

    (Gustavson School of Business, University of Victoria)

Abstract

Based on rare policy changes in the Chinese stock market in January 2016, we study the impacts of market-wide circuit breakers on market microstructure. To test if market-wide circuit breakers have the “cooling effect” and the magnet effect, we use high frequency transactions and limit order book data and Lasso IV models for endogenous market microstructure variables and exogenous policy variables based on a novel identification strategy. We find that market-wide circuit breakers have no “cooling effect” in decelerating falling prices (or returns) or reducing market volatility and order imbalance. Their presence does not affect bid-ask spreads but does reduces the large-, mid-, and small-sized trades in volume and trades. We also find that market-wide circuit breakers indeed induce significant magnet effects on stock returns, order imbalance, quote imbalance, and trades of various sizes.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Steven Shuye Wang & Kuan Xu & Hao Zhang, 2019. "A Microstructure Study of Circuit Breakers in the Chinese Stock Markets," Working Papers daleconwp2019-02, Dalhousie University, Department of Economics.
    • Handle: RePEc:dal:wpaper:daleconwp2019-02
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    References listed on IDEAS

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    2. Wong, Kin Ming & Kong, Xiao Wei & Li, Min, 2020. "The magnet effect of circuit breakers and its interactions with price limits," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    3. Su, Zhi & Lyu, Tongtong & Yin, Libo, 2022. "China's illiquidity premium: Due to risk-taking or mispricing?," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
    4. Kitajima, Kiichi, 2022. "Passive investors and concentration of intraday liquidity: Evidence from the Tokyo Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    5. Cheng Xiang & Jing Lu, 2023. "Magnet effects of circuit breakers in electronic order‐driven markets: Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1450-1469, April.
    6. Sifat, Imtiaz Mohammad & Mohamad, Azhar, 2020. "A survey on the magnet effect of circuit breakers in financial markets," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 138-151.
    7. Tao Huang & Xueyong Zhang, 2022. "Media coverage of industry and the cross‐section of stock returns," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1107-1141, April.

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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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