Price Discovery in European Volatility Interruptions
30 Pages Posted: 11 Dec 2013 Last revised: 30 Oct 2014
Date Written: December 10, 2013
We study a special form of securities market circuit breaker, i.e., European volatility interruptions. Instead of halt trading like traditional circuit breaker, these short-living call auctions allow for continual price discovery after price limit hits. Based upon approximately 1,800 Xetra volatility interruption events from 01/2009 to 01/2012, we empirically assess whether such auctions contribute to price uncertainty resolution and how they influence post-auction continuous trading. We find that volatility interruptions dissolve on average 36 percent of the pre-interruption price uncertainty. In addition, our results provide strong indications that this level of price discovery is a major determinant in shaping post-interruption market quality as subsequent continuous trading benefits conditionally on the price discovery contribution of the interruption. By analyzing drivers of volatility interruption price discovery, our results give indications that in contrast to a prolongation of the call phase, foremost traders' participation does promote the auction's ability to display a price relevant for future trading.
Keywords: Circuit Breaker, Volatility Interruptions, Price Discovery, Europe
JEL Classification: G14, G15, G18, G28
Suggested Citation: Suggested Citation