An Experimental Study of Circuit Breakers: The Effects of Mandated Market Closures and Temporary Halts on Market Behavior

Lucy F. Ackert, Bryan K. Church, and Narayanan Jayaraman
Federal Reserve Bank of Atlanta
Working Paper 99-1
March 1999

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This paper analyzes the effect of circuit breakers on price behavior, trading volume, and profit-making ability in a market setting. We conduct nine experimental asset markets to compare behavior across three regulatory regimes: market closure, temporary halt, and no interruption. The presence of a circuit breaker rule does not affect the magnitude of the absolute deviation in price from fundamental value or trading profit. The primary driver of behavior is information asymmetry in the market. By comparison, trading activity is significantly affected by the presence of a circuit breaker. Mandated market closures cause market participants to advance trades.

JEL classification: D40, G10, G14

Key words: circuit breakers, trading halts, market structure

The authors thank the Federal Reserve Bank of Atlanta for financial support, Kendra Hiscox for valuable research assistance, and Jin-Wan Cho, Jerry Dwyer, Kalpana Narayanan, Joe Sinkey, and seminar participants at Georgia Tech and the Atlanta Finance Workshop for helpful comments. 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.

Please address questions regarding content to Lucy F. Ackert, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, NW, Atlanta, Georgia 30303-2713, 404/498-8783,, or Bryan K. Church or Narayanan Jayaraman, DuPree College of Management, Georgia Institute of Technology, Atlanta, Georgia 30332-0520, 404/894-3907 (Church),, 404/894-4389 (Jayaraman),