Circuit breakers and market runs

Dion Bongaerts, Sarah D De Luca and Mark Van Achter

Review of Finance, 2024, vol. 28, issue 6, 1953-1989

Abstract: Traders may run on financial markets merely out of fear of future liquidity shocks. We present a model that shows that adequately calibrated circuit breakers can prevent such coordination failures by curbing excessive trading. It suggests a novel, forward-looking circuit breaker that becomes most restrictive in cases when expected welfare losses of inefficient market runs are largest. The probabilities of current and future liquidity shortages are important determinants for such welfare-optimized circuit breakers. We empirically illustrate how to calibrate these parameters. We also determine under which economic conditions circuit breakers damage welfare and should not be implemented.

Keywords: trading halt; liquidity shock; welfare; circuit breakers (search for similar items in EconPapers)
JEL-codes: G10 G18 G20 (search for similar items in EconPapers)
Date: 2024
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