The cross-sectional spillovers of single stock circuit breakers

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 26 October 2018

Staff Working Paper No. 759

By James Brugler, Oliver Linton, Joseph Noss and Lucas Pedace

This paper uses transaction data to estimate how single stock circuit breakers on the London Stock Exchange affect other stocks that remain in continuous trading. This ‘spillover’ effect is estimated by calculating the effect of a trading halt on the market quality of stocks that remain in continuous trading and comparing this with the effect of a stock whose absolute returns are of a magnitude nearly sufficient to trigger a trading halt but do not do so. Market quality is measured using a combination of trading costs, volatility and volume. We find that circuit breakers lead to a significant improvement in the liquidity, and reduction in the volatility, of stocks that remain in continuous trading. This might suggest that - at least over the period covered by our data - single stock circuit breakers play an important role in reducing the spillover of poor market quality across stocks.

PDFThe cross-sectional spillovers of single stock circuit breakers

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