The Magnet Effect of Circuit Breakers and Its Interactions with Price Limits

Abstract

Market-wide circuit breaker is one of typical market mechanisms in stock exchanges but little evidence exists on its impacts on stock returns. Using high frequency data during the four-day period which a circuit breaker was imposed in Chinese stock exchanges, this paper examines the magnet effect of market-wide circuit breakers and its interactions with the magnet effect of price limits. We provide evidences that magnet effect of circuit breaker exists in both market index returns and individual stock returns. Furthermore, magnet effect of price ceilings magnifies when a trigger of market-wide circuit breaker is more likely.