Circuit Breakers and Market Volatility: A Theoretical Perspective

Avanidhar Subrahmanyam

Journal of Finance, 1994, vol. 49, issue 1, 237-54

Abstract: This paper examines ex ante effects of 'circuit breakers' (mandated trading halts). The author shows that circuit breakers, by causing agents to suboptimally advance trades in time, may have the perverse effect of increasing price variability and exacerbating price movements. He next considers 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. Copyright 1994 by American Finance Association.

Date: 1994
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