Circuit Breakers and Market Volatility: A Theoretical Perspective
Posted: 1 Sep 1999
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: Suggested Citation