Don't Stop Me Now! Identification and Prediction of Unnecessary Volatility Interruptions

45 Pages Posted: 14 Dec 2024

See all articles by Benjamin Clapham

Benjamin Clapham

Goethe University Frankfurt Faculty of Economics and Business Administration

Peter Gomber

Goethe University Frankfurt Faculty of Economics and Business Administration

Florian Ewald

Goethe University Frankfurt

Niklas Trimpe

Goethe University Frankfurt - Faculty of Economics and Business Administration

Abstract

Exchange operators use circuit breakers like volatility interruptions to prevent transitory or error-induced price shocks. However, these mechanisms can impede market efficiency if triggered by legitimate price changes due to new information. We introduce a clustering approach to identify unnecessary volatility interruptions that are triggered within persistent price trends, thereby delaying price discovery. Our findings indicate that such interruptions are more likely to occur when liquidity and order book activity are high and relevant news is present. To improve market design, we propose a deep learning model that can predict unnecessary interruptions based on pre-interruption market and news data.

Keywords: Circuit Breakers, Volatility Interruptions, market quality, price discovery, Market Design, Machine learning

Suggested Citation

Clapham, Benjamin and Gomber, Peter and Ewald, Florian and Trimpe, Niklas, Don't Stop Me Now! Identification and Prediction of Unnecessary Volatility Interruptions. Available at SSRN: https://ssrn.com/abstract=5055236 or http://dx.doi.org/10.2139/ssrn.5055236

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

Florian Ewald

Goethe University Frankfurt ( email )

Niklas Trimpe

Goethe University Frankfurt - Faculty of Economics and Business Administration

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

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