Circuit Breakers with Uncertainty about the Presence of Informed Agents: I Know What You Know . . . I Think

Lucy F. Ackert, Bryan K. Church, and Narayanan Jayaraman
Working Paper 2002-25
December 2002

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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.

Please address questions regarding content to Lucy F. Ackert, Department of Economics and Finance, Coles College of Business, Kennesaw State University, 1000 Chastain Road, Kennesaw, Georgia 30144, 770-423-6111,, and Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street N.E., Atlanta, Georgia 30309-4470; Bryan K. Church, DuPree College of Management, Georgia Institute of Technology, Atlanta, Georgia 30332-0520, 404-894-3907,; or Narayanan Jayaraman, DuPree College of Management, Georgia Institute of Technology, Atlanta, Georgia 30332-0520, 404-894-4389,