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The Dark Side of Circuit Breakers

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Listed:
  • HUI CHEN
  • ANTON PETUKHOV
  • JIANG WANG
  • HAO XING

Abstract

Market‐wide circuit breakers are trading halts aimed at stabilizing the market during dramatic price declines. Using an intertemporal equilibrium model, we show that a circuit breaker significantly alters market dynamics and affects investor welfare. As the market approaches the circuit breaker, price volatility rises drastically, accelerating the chance of triggering the circuit breaker—the so‐called “magnet effect,” returns exhibit increasing negative skewness, and trading activity spikes up. Our empirical analysis supports the model's predictions. Circuit breakers can affect overall welfare negatively or positively, depending on the relative significance of investors' trading motives for risk sharing versus irrational speculation.

Suggested Citation

  • Hui Chen & Anton Petukhov & Jiang Wang & Hao Xing, 2024. "The Dark Side of Circuit Breakers," Journal of Finance, American Finance Association, vol. 79(2), pages 1405-1455, April.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:2:p:1405-1455
    DOI: 10.1111/jofi.13310
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    References listed on IDEAS

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