Managing Excess Volatility: Design and Effectiveness of Circuit Breakers

35 Pages Posted: 3 Feb 2017  

Benjamin Clapham

Goethe University Frankfurt Faculty of Economics and Business Administration

Peter Gomber

Goethe University Frankfurt Faculty of Economics and Business Administration

Martin Haferkorn

Goethe University Frankfurt Faculty of Economics and Business Administration

Sven Panz

Goethe University Frankfurt - Faculty of Economics and Business Administration

Date Written: February 2, 2017

Abstract

We investigate different designs of circuit breakers implemented on European trading venues and examine their effectiveness to manage excess volatility and to preserve liquidity. Specifically, we empirically analyze volatility and liquidity around volatility interruptions implemented on the German and Spanish stock market which differ regarding specific design parameters. We find that volatility interruptions in general significantly decrease volatility in the post interruption phase. Unfortunately, this decrease in volatility comes at the cost of decreased liquidity. Regarding design parameters, we find tighter price ranges and shorter durations to support volatility interruptions in achieving their goals.

Keywords: Circuit Breaker, Volatility Interruption, Volatility, Liquidity, Market Design

JEL Classification: G14, G15, G18, G28

Suggested Citation

Clapham, Benjamin and Gomber, Peter and Haferkorn, Martin and Panz, Sven, Managing Excess Volatility: Design and Effectiveness of Circuit Breakers (February 2, 2017). Available at SSRN: https://ssrn.com/abstract=2910977 or http://dx.doi.org/10.2139/ssrn.2910977

Benjamin Clapham (Contact Author)

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60323
Germany

Peter Gomber

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Grueneburgplatz 1
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.efinancelab.de/no_cache/team/?user_wiwipubs_pi2[showUid]=478

Martin Haferkorn

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60323
Germany

Sven Panz

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, D-60325
Germany

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