Work

Circuit breakers and market runs

Year: 2024

Type: article

Abstract: Traders may run on financial markets merely out of fear of future liquidity shocks. We present a model that shows that adequately calibrated circuit breakers can prevent such coordination failures by curbing excessive trading. It suggests a novel, forward-looking circuit breaker that becomes most restrictive in cases when expected welfare losses of inefficient market runs are largest. The probabilities of current and future liquidity shortages are important determinants for such welfare-optimized circuit breakers. We empirically illustrate how to calibrate these parameters. We also determine under which economic conditions circuit breakers damage welfare and should not be implemented.

Source: European Finance Review

DOI: 10.1093/rof/rfae029

Authors: Dion Bongaerts, Sarah D De Luca, Mark Van Achter

Institutions: Erasmus University Rotterdam, KU Leuven

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $5,099

Funders: Comer Science and Education Foundation, University of Warwick