Dynamic Runs and Circuit Breakers: An Experiment
Magnani, Jacopo, and David Munro. 'Dynamic Runs and Circuit Breakers: An Experiment.' Experimental Economics 23.1 (2020): 127-153.
Posted: 23 Mar 2021
Date Written: Feb 4, 2019
Although now widespread in financial markets, circuit breakers remain controversial among researchers and professional investors. We formalize the popular argument that circuit breakers provide a “cooling-off” period for investors during market runs and we test it in the laboratory. Our experiment reproduces a market where investors fear future liquidity shocks but receive news about the true state over time. Notably, we find that when information quality is poor circuit breakers can have perverse effects on trading behavior. However, when information quality is high, circuit breakers can improve welfare by providing agents with time to learn about the true state, when private incentives to wait for more information are insufficient.
Keywords: circuit breakers, market runs, experiment
JEL Classification: G02, G18, G01.
Suggested Citation: Suggested Citation