Brown Bag Seminar: The bright side of circuit breakers

We study the impact of circuit breakers on the prices and volatility of individual stocks, exploiting the large number of events triggered during the Covid-19 crisis and employing identification strategies that recover the causal effects of trading halts using high-frequency synthetic controls. We show that circuit breakers increase volatility both before their activation, consistent with a magnet effect, and after trading resumes. However, the volatility impact is transitory and dissipates within a few hours. In contrast, we provide causal evidence that circuit breakers induce price corrections. Based on our estimates, we argue that the welfare costs associated with heightened volatility are substantially smaller than the welfare benefits arising from price correction.