Circuit Breakers and Market Runs

Sarah Draus, MA Van Achter

Research output: Working paperAcademic

Abstract

Merely out of fear for future liquidity shocks, traders may run on financial markets. We show this coordination failure could be overcome by applying circuit breakers (which curb excessive trading). However, the common-practice circuit breakers fall short of their potential and could even damage welfare. Our analysis suggests a novel forward-looking circuit breaker which (i) becomes most restrictive precisely when the expected social loss related to inefficient upfront trading is largest, and (ii) is only implemented when it yields a welfare contribution. Bridging to practice, the calibration of this welfare-optimal circuit breaker among others reflects (the fear of future) funding liquidity constraints.
Original languageEnglish
PublisherCentre for Studies in Economics and Finance (CSEF)
Publication statusPublished - 2012

Research programs

  • RSM F&A

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