Unintended consequences of market-wide circuit breakers in China

Abstract

This study examines the effectiveness of market-wide circuit breakers in China, specifically on January 4 and 7, 2016, focusing on their impact on price discovery, volatility, and trader behaviour. Unlike previous research, it explores the broader implications of market-wide halts, analysing the spillover effects between A- and B-share markets. The findings reveal that these circuit breakers failed to stabilise the market and instead delayed price discovery, contributing to increased volatility and speculative activity. It also highlights how information asymmetry and liquidity imbalances influence the “magnet effect” near trigger levels. By examining the Chinese context, where individual investors dominate, this research extends existing theories on circuit breakers, offering valuable insights for market regulation in emerging economies.