Circuit Breakers and Market Volatility: A Theoretical Perspective



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    • Graduate School of Business, Columbia University. The comments of an anonymous referee helped improve this paper immensely. I also thank René Stulz (the editor), Joel Hasbrouck, James Shapiro, Larry Glosten, Larry Harris and the individuals cited in footnote 4 for useful comments and/or discussions.


This paper examines ex ante effects of circuit breakers (mandated trading halts). We show that circuit breakers, by causing agents to suboptimally advance trades in time, may have the perverse effect of increasing price variability and exacerbating price movements. We next consider a situation in which a circuit breaker causes trading to be halted in both a dominant (more liquid) and a satellite market. As agents switch from the dominant market to the satellite market, price variability and market liquidity decline on the dominant market and increase on the satellite market.