Intraday price jumps, market liquidity, and the magnet effect of circuit breakers

Abstract

This paper studies the magnet effect of market-wide circuit breakers using high-frequency data from the Chinese stock index futures market. Unlike previous studies that mainly analyze the price trend and volatility, this paper is the first to consider intraday price jumps in studying the magnet effect. We find that when a market-wide trading halt is imminent, both the probability of a price decrease and the level of market volatility remain stable. However, the conditional probability of observing a price jump increases significantly, leading to a higher possibility of triggering market-wide circuit breakers, which is in support of the magnet effect hypothesis. In addition, we find a significant increase in liquidity demand but no significant change in liquidity supply ahead of a market-wide trading halt, suggesting that liquidity imbalance plays an important role in explaining the magnet effect.