Circuit Breakers and Market Volatility: A Theoretical Perspective

Posted: 1 Sep 1999

See all articles by Avanidhar Subrahmanyam

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Abstract

This paper examines ex ante effects of "circuit breakers" (mandated trading halts). We show that circuit breakers, by causing agents to suhoptimally advance trades in time, may have the perverse effect of increasing price variability and exacerbating price movements. We next consider a situation in which a circuit breaker causes trading to be halted in both a "dominant" (more liquid) and a "satellite" market. As agents switch from the dominant market to the satellite market, price variability and market liquidity decline on the dominant market and increase on the satellite market.

JEL Classification: G12, G18

Suggested Citation

Subrahmanyam, Avanidhar, Circuit Breakers and Market Volatility: A Theoretical Perspective. Available at SSRN: https://ssrn.com/abstract=5304

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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