THE WORKING OF CIRCUIT BREAKERS WITHIN PERCOLATION MODELS FOR FINANCIAL MARKETS

Gudrun Ehrenstein () and Frank Westerhoff
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Gudrun Ehrenstein: Institute for Theoretical Physics, Cologne University, Zülpicherstraße 77, D-50937 Köln, Germany

International Journal of Modern Physics C (IJMPC), 2006, vol. 17, issue 02, 299-304

Abstract: We use a modified Cont–Bouchaud model to explore the effectiveness of trading breaks. The modifications include that the trading activity of the market participants depends positively on historical volatility and that the orders of the agents are conditioned on the observed mispricing. Trading breaks, also called circuit breakers, interrupt the trading process when prices are about to exceed a pre-specified limit. We find that trading breaks are a useful instrument to stabilize financial markets. In particular, trading breaks may reduce price volatility and deviations from fundamentals.

Keywords: Econophysics; percolation models; financial markets; trading breaks; 89.65.Gh (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0129183106009035

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