When Do Circuit Breakers Stabilize Markets? Evidence and Theory

Tianlin Hu () and Yang Ming ()
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Tianlin Hu: Institute for Economic and Social Research, Jinan University, Guangdong, China
Yang Ming: China Economics and Management Academy, Central University of Finance and Economics, Beijing, China

Annals of Economics and Finance, 2025, vol. 26, issue 2, 573-613

Abstract: Circuit breakers, as automatic trading halt mechanisms, have ambiguous effects on stock market volatility. To identify the conditions under which such mechanisms are effective, we first examine China’s short-lived circuit breaker introduced in January 2016. Using high-frequency CSI 300 Index data and a GJR-GARCH model, we find that circuit breaker activations signifcantly increased market volatility. We then extend market microstructure models by endogenizing asset supply shocks and comparing scenarios with and without circuit breakers. The analysis shows that when shocks are relatively mild, circuit breakers help dampen volatility, whereas under severe market crises, they amplify fluctuations. These findings highlight the need for carefully calibrated trigger thresholds and complementary stabilization measures to ensure that circuit breakers fulfill their intended role in stabilizing financial markets.

Keywords: Circuit breakers; Market volatility; Market microstructure; Financial regulation (search for similar items in EconPapers)
JEL-codes: G18 G28 (search for similar items in EconPapers)
Date: 2025
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