Circuit Breaker Effects on Market Players Psychology and Behavior

Abstract

Since the Black Monday of 1987, Stock Markets worldwide have adopted several financial regulatory measures to cease the free flow of market crashes during times of extreme volatility. Circuit Breakers, a.k.a trading curb is a regulatory instrument that halts trading and stabilizes the extreme volatility. This research paper analyses Circuit Breakers in the Stock market, their impacts, and their effects on market behavior. The study reviews the history of the circuit breaker implementation and the impact it causes on market behaviors such as volatility, the difference in return pre and post-circuit breaker events. This study considers Nifty 50 index data for a total period of 60 days, 30 days prior, and 30 days post-implementation of circuit breakers. The thesis explores the importance of the market-wide circuit breaker in India and the history of the circuit breaker. This research uses Bloomberg data on the closing price and volume of the Nifty 50 index on 12 separate windows, such as pre-and post-circuit breakers of respective six times as an industry-wide circuit breaker the Indian stock market. The sample determines the disparity in return and volatility between the pre and post-circuit breaker periods based on the mean and standard deviation. The impact of a circuit breaker lasts for up to 10 days in most cases and up to 20 days in some cases; however, the impact of a circuit breaker lasts for up to 30 days in some cases.