What Makes Circuit Breakers Attractive to Financial Markets? A Survey

Kim, Yong H.; Yang, Jie

doi:10.1111/j.0963-8008.2004.00074.x

Cited by 76 publications

(36 citation statements)

References 79 publications

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“…With regards to the effectiveness of price limits system that was in place in some of the Asian stock markets, the high volatility during the crisis period seems to indicate that it was not functioning well. This is not surprising as empirical evidence suggests that the imposition of price limits does not yield the desired effect of reducing stock market volatility (see Kim & Yang, 2004 for a survey of the literature). Though it can be deduced from our results that the price limits are also ineffective in improving market efficiency, a more detailed study in this aspect is needed.…”

Section: Discussionmentioning

confidence: 99%

Financial crisis and stock market efficiency: Empirical evidence from Asian countries

Lim

Brooks

Kim

2008

International Review of Financial Analysis

206

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Section: Discussionmentioning

confidence: 99%

Financial crisis and stock market efficiency: Empirical evidence from Asian countries

Lim

Brooks

Kim

2008

International Review of Financial Analysis

206

View full text Add to dashboard Cite

“…Y. Kim and Yang (2004), within their volatility hypothesis, consider the time duration during which traders can obtain new information, reassess the market price, and avoid or correct overreactions, crucial for volatility reduction. We therefore include the total duration of the volatility interruption (midday auction), measured in seconds, in the following analysis.…”

Section: Determinants Of Price Discoverymentioning

confidence: 99%

Price Discovery in European Volatility Interruptions

Zimmermann

2013

SSRN Journal

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We study a special form of securities market circuit breaker, i.e., European volatility interruptions. Instead of halt trading like traditional circuit breaker, these short-living call auctions allow for continual price discovery after price limit hits. Based upon approximately 1,800 Xetra volatility interruption events from 01/2009 to 01/2012, we empirically assess whether such auctions contribute to price uncertainty resolution and how they inuence post-auction continuous trading. We nd that volatility interruptions dissolve on average 36 percent of the pre-interruption price uncertainty. In addition, our results provide strong indications that this level of price discovery is a major determinant in shaping post-interruption market quality as subsequent continuous trading benets conditionally on the price discovery contribution of the interruption. By analyzing drivers of volatility interruption price discovery, our results give indications that in contrast to a prolongation of the call phase, foremost traders' participation does promote the auction's ability to display a price relevant for future trading.

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“…Further theoretical research focuses on the ability of circuit breakers to limit daily liabilities of market participants and the costs of portfolio adjustments (Kim and Yang, 2004) as well as their positive effect on overall welfare (Westerhoff, 2003). Additionally, the effect of circuit breakers on market runs (Draus and van Achter, 2012) and the ability of circuit breakers to prevent market manipulation (Kim and Park, 2010) as well as abusive pricing by dealers (Edelen and Gervais, 2003) are investigated.…”

Section: Theoretical Background and Empirical Findingsmentioning

confidence: 99%

Managing Excess Volatility: Design and Effectiveness of Circuit Breakers

et al. 2017

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Circuit breakers are volatility safeguards that shall protect markets from extreme price fluctuations, excessive volatility and overreactions. Especially in the context of today's highly automated trading and the large number of transactions conducted by algorithmic and highfrequency trading (HFT) firms, circuit breakers aim at ensuring market stability. Moreover, several flash crash type events, i.e., phases of high volatility and large price swings in very short time spans, have become an increasing phenomenon in recent years highlighting the importance of circuit breakers.Consequently, circuit breakers and their design gained public and regulatory attention, which also led to regulatory initiatives regarding the introduction and the configuration of these mechanisms. While the majority of trading venues has some kind of circuit breaker in place, these safeguards significantly differ in their design, which might be one of the reasons why academic studies come to different conclusions whether circuit breakers are beneficial or not. This paper adds to the literature on circuit breakers by analyzing how different design parameters influence the effectiveness of circuit breakers to calm securities markets during phases of high volatility. For our analysis, we compare volatility interruption mechanisms on two European venues, which differ in relevant design parameters. A volatility interruption is a specific type of circuit breaker that interrupts continuous trading with an unscheduled call auction. Our results show that a shorter duration and narrower price ranges support their effectiveness. The disclosure respectively non-disclosure of triggering thresholds, however, has no effect on the interruption's effectiveness, which might result from the possibility to approximate the thresholds based on tick-by-tick trade data. Furthermore, there is empirical evidence that volatility interruptions triggered by market-wide events are not as effective as interruptions triggered by single-stock events.With our empirical analysis, we show that circuit breakers in the form of volatility interruptions are able to reduce volatility but are also associated with a drop in liquidity. In particular, our results reveal how design parameters such as duration, width of triggering thresholds, and the publication of these thresholds influence the effectiveness of volatility interruptions in reducing volatility and preserving liquidity. These results may serve as a starting point for exchange operators and regulators to review existing circuit breaker designs or to start implementing them AbstractWe investigate different designs of circuit breakers implemented on European trading venues and examine their effectiveness to manage excess volatility and to preserve liquidity. Specifically, we empirically analyze volatility and liquidity around volatility interruptions implemented on the German and Spanish stock market which differ regarding specific design parameters. We find that volatility interruptions in general significantly decrease v...

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What Makes Circuit Breakers Attractive to Financial Markets? A Survey

Cited by 76 publications

References 79 publications

Financial crisis and stock market efficiency: Empirical evidence from Asian countries

Financial crisis and stock market efficiency: Empirical evidence from Asian countries

Price Discovery in European Volatility Interruptions

Managing Excess Volatility: Design and Effectiveness of Circuit Breakers

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