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

See all articles by Jacopo Magnani

Jacopo Magnani

EMLYON Business School

David Munro

Middlebury College

Date Written: Feb 4, 2019

Abstract

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

Magnani, Jacopo and Munro, David, Dynamic Runs and Circuit Breakers: An Experiment (Feb 4, 2019). Magnani, Jacopo, and David Munro. 'Dynamic Runs and Circuit Breakers: An Experiment.' Experimental Economics 23.1 (2020): 127-153., Available at SSRN: https://ssrn.com/abstract=3801789

Jacopo Magnani

EMLYON Business School

23 Avenue Guy de Collongue
Ecully, 69132
France

David Munro (Contact Author)

Middlebury College ( email )

Munroe Hall
Middlebury, VT 05753
United States

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