| dc.description.abstract | The Securities and Exchange Commission (SEC) sets S&P 500 index circuit breakers, which halt trading due to sudden market declines, at specific price drops, such as a 7 percent price change (Level 1) from the previous trading day's closing price. Also, trading halts due to circuit breakers occur at a 13 percent (Level 2) and 20 percent (Level 3) price change from the previous close. Regardless of the level of the triggered breaker, trading across all stock market platforms halts for a minimum of 15 minutes. However, longer trading halts may occur depending on the price percentage change and when the breaker is triggered during trading hours. These circuit breakers are meant to allow traders additional time to think about changes in the market and their investment positions during trading halts. However, whether this additional time calms the market or increases its volatility is still a matter of debate. Thus far, the literature has addressed this issue theoretically or empirically for other countries. Given that circuit breakers went off four times in March, we can study the effect of the breakers on market returns and volatility for the U.S. empirically. This thesis will analyze high-frequency, 15-minute interval S&P 500 returns, S&P 500-based realized volatility, and Chicago Board Options Exchange (CBOE) Option-Implied Volatility data from March 2020 to determine the average impact of a circuit breaker's triggering on market volatility measures and market returns.
The markets, in general, were unstable in March 2020, and this volatility can be associated with the spread of COVID-19 and the instituted non-pharmaceutical interventions (NPI) due to state-mandated social distancing restrictions. In addition, uncertainty over future economic outcomes, upcoming quarterly corporate earnings, and the Saudi-Arabia oil price war, in which Saudi-Arabia heavily discounted the price of oil following the collapse of their extraction deal with Russia. The goal of this thesis is not to identify what triggered a circuit breaker, but instead, understand the impact of a circuit breaker on the market in an environment in which these possible changes occur. To do so, we control for some of the events discussed above in this study.
Overall, I find that stock market circuit breakers do not destabilize financial markets despite an increase in S&P 500 volatility. Instead, they can either improve market dynamics or have zero effect on the market. | |
