Transactional Risk, Market Crashes, and the Role of Circuit Breakers

Bruce C. Greenwald and Jeremy Stein

Scholarly Articles from Harvard University Department of Economics

Abstract: The authors develop a pair of models that illustrate how imperfections in transfunctional mechanisms can lead to a market crash. Neither market orders nor limit orders allow traders to condition their demands on the full information set needed to achieve a Walrasian outcome. When volume shocks are sufficiently large, the deviations from Walrasian prices and allocations are large also. Properly designed and implemented, circuit breakers may help to overcome some of these informational problems and thereby improve the market's ability to absorb large volume shocks.

Date: 1991
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Published in Journal of Business -Chicago-

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Journal Article: Transactional Risk, Market Crashes, and the Role of Circuit Breakers (1991)
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