A survey on the magnet effect of circuit breakers in financial markets

Abstract

Proponents of circuit breakers justify the practice citing its utility in placating stressed markets, persuading agents to reflect on available information, and to trade rationally. Opponents counter by calling it an infringement on laissez-faire price discovery process citing the lack of conclusive evidence of their effectiveness in market crises. After nearly three decades of theoretical and empirical scrutiny, this discord persists. Most of the empirical focus in this domain revolves around ex-post performance of circuit breakers in cooling off the market, interference in trading, volatility splattering, and delayed assimilation of information. A less explored hypothesis is a potential for traders to hasten trading plans fearing illiquidity or trading blockade. Thus, the existence of the circuit breaker alone can induce its tripping. Known formally as the magnet effect, this hypothesis remains less explored due-inter alia-to paucity of data and methodological limitations. Greater availability of high-frequency datasets in recent times, however, has spurred a growth in empirical works focusing purely on the magnet effect hypothesis. As this nascent subdiscipline in market microstructure grows, this paper undertakes one of the first formal surveys looking to consolidate theoretical and empirical works on magnet effect. Moreover, we discuss methodological challenges and analytic limitations which strain the credibility of academic research findings in this domain; particularly among regulators.

Are News Effects Necessarily Asymmetric? Evidence from Bangladesh Stock Market

“…Oskooe and Shamsavari (2011) alluded to the price limit as one of the reasons for the observed lack of asymmetric effects in Iranian case. A survey on various aspects of circuit-breakers can be found in Sifat and Mohamad (2020).…”

“…The selection of Bangladesh stock market as a case study is prompted by the country's economic potential depicted through its highest average GDP growth record (about 6.04% with SD = 1.18) in South Asia during 2000-2020(International Monetary Fund & World Economic Outlook Database, April 2021 which is projected to be even higher (7.1%) in 2023 by the Asian Development Bank (Bangladesh and ADB, Asian Development Bank accessed 12 April, 2022). Furthermore, the recognition as a frontier market by the International Finance Corporation (IFC) since 1997 (Gilbert, 2019), its ambition to achieve the status of a higher middle-income country by 2031 (Bangladesh Overview: Development news, research, data, World Bank, accessed April 16, 2022) and government's concerted efforts to make the country as an investment destination for foreigners by making necessary regulatory changes and offering various incentives, etc.…”