This study conducts experimental asset markets to examine the effects of circuit breaker rules on market behavior when agents are uncertain about the presence of private information. Our results unequivocally indicate that circuit breakers fail to temper unwarranted price movements in periods without private information. Agents appear to mistakenly infer that others possess private information, causing price to move away from fundamental value. Allocative efficiencies in our markets are high across all regimes. Circuit breakers perform no useful function in our experimental asset markets.
JEL classification: D82; G18
Keywords: circuit breaker, experimental asset markets, trading interruption, private information
The authors thank the Federal Reserve Bank of Atlanta for financial support, an anonymous referee for helpful comments, and Kendra Hiscox and Laura Jenkins for valuable research assistance. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
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