Circuit Breakers and Magnet Effect: Empirical Evidence from Chinese Securities Market

41 Pages Posted: 20 Aug 2020

See all articles by Jie Liu

Jie Liu

Fujian Agriculture and Forestry University

Yinglun Zhu

China Institute of Finance and Capital Markets

Jianzhi Zhu

Agricultural Bank of China

Date Written: July 31, 2019

Abstract

This paper examines the impact of circuit breakers on the stock price using the empirical evidence from Chinese securities market in 2016. The empirical evidence indicates that circuit breakers trigger the magnet effect and stocks on trading days with circuit breakers show a significant downward tendency when index approaches circuit breaker thresholds, compared to stocks of the control group. In addition, the magnet effect is more significant for stocks with better past returns, lower liquidity and higher trading leverage. Moreover, stocks with better past returns and higher liquidity obtain higher returns on the next trading day, while trading leverage has little impact. The results not only contribute to the previous literature by demonstrating the existence of the magnet effect and investigating its influencing factors, but also illustrate that the magnet effect is one of the most important reasons why the circuit breakers mechanism failed to stabilize the stock price in China.

Keywords: Circuit Breaker; Magnet Effect; Market Liquidity; Margin Trading

JEL Classification: G11, G12, G18

Suggested Citation

Liu, Jie and Zhu, Yinglun and Zhu, Jianzhi, Circuit Breakers and Magnet Effect: Empirical Evidence from Chinese Securities Market (July 31, 2019). Available at SSRN: https://ssrn.com/abstract=3624703 or http://dx.doi.org/10.2139/ssrn.3624703

Jie Liu (Contact Author)

Fujian Agriculture and Forestry University ( email )

Fujian Road
Fuzhou, Cangshan District 350002
China

Yinglun Zhu

China Institute of Finance and Capital Markets ( email )

Beijing, Beijing
China

Jianzhi Zhu

Agricultural Bank of China ( email )

Beijing, Beijing
China

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