Abstract
As the most influential regulation in 2016, China launched circuit breakers in the financial markets. However, the circuit breaker mechanism was implemented for only four days and then suspended. Many criticisms then stated that circuit breakers impeded trading behavior in Chinese financial markets. This study explores this short-life circuit breaker mechanism in China, and examines whether circuit breakers impede trading behavior in Chinese financial markets as many criticisms stated. We use an intraday dataset and investigate the circuit breakers. Contrary to those criticisms, we find that circuit breakers are not easily reachable and have no “magnet effect” between two thresholds of breakers. We also find that without protection of circuit breakers, potential large market fluctuations will have negative impacts on individual stocks’ liquidity and value. As the major contribution, our study indicates that Chinese financial markets still need a circuit breaker mechanism to protect investors’ benefits and maintain the market liquidity and stability.
Highlights
Circuit breaker is an automatically trading suspension mechanism that many financial trading venues use to decrease price volatility
China Securities 300 Stocks Index (CSI 300), rises or falls by 5% of the closing price of the previous trading day, the stock trading will
The objective of this paper is to explore this short-life circuit breaker mechanism in China, and examine whether circuit breakers impede trading behavior in Chinese financial markets
Summary
Circuit breaker is an automatically trading suspension mechanism that many financial trading venues use to decrease price volatility. China Securities 300 Stocks Index (CSI 300), rises or falls by 5% of the closing price of the previous trading day, the stock trading will This is an Open Access article published by World Scientific Publishing Company. The objective of this paper is to explore this short-life circuit breaker mechanism in China, and examine whether circuit breakers impede trading behavior in Chinese financial markets. The thresholds of circuit breakers are too close to each other, and may generate the “magnet effect” to accelerate the market to reach threshold level II after passing level I (Gao and Yang, 2016; Liu, 2016; Xu and Lu, 2016; Yang, 2016) This circuit breaker mechanism prevents the market liquidity and pricing discovery for investors’ trading (Pi, 2015; Wang, 2016; Zhu, 2016).
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