An Experimental Study of Circuit Breakers: The Effects of Mandated Market Closures and Temporary Halts on Market Behavior
Federal Reserve Bank of Atlanta Working Paper No. 99-1
Posted: 10 May 1999
Date Written: March 1999
This paper analyzes the effect of circuit breakers on price ehavior, trading volume, and profit-making ability in a market setting. We conduct nine experimental asset markets to compare behavior across three regulatory regimes: market closure, temporary halt, and no interruption. The presence of a circuit breaker rule does not affect the magnitude of the absolute deviation in price from fundamental value or trading profit. The primary driver of behavior is information asymmetry in the market. By comparison, trading activity is significantly affected by the presence of a circuit breaker. Mandated market closures cause market participants to advance trades.
JEL Classification: D40, G10, G14
Suggested Citation: Suggested Citation