Managing Excess Volatility: Design and Effectiveness of Circuit Breakers

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We investigate different designs of circuit breakers implemented on major European trading venues and examine their effectiveness to manage excess volatility and to preserve liquidity. Specifically, we empirically analyze volatility and liquidity around volatility interruptions implemented on the German and Spanish stock market which differ regarding specific design parameters. We find that volatility interruptions in general significantly decrease volatility in the post interruption phase. Unfortunately, this decrease in volatility comes at the cost of decreased liquidity. Regarding design parameters, we find tighter price ranges and shorter durations to support volatility interruptions in achieving their goals.

Author(s):

Benjamin Clapham    
Goethe University Frankfurt
Germany

Peter Gomber    
Goethe University Frankfurt
Germany

Martin Haferkoren    
Goethe University Frankfurt
Germany

Sven Panz    
Goethe University Frankfurt
Germany