Market-Wide Circuit Breakers: A Critical Analysis of their Impact on Stock Market Stability in India

The market-wide circuit breaker mechanism was introduced in India on 02 July 2001 with the intent of restraining intense movements in the market. It is a financial instrument that works to prevent both overabundant losses as well as speculative gains within a short span of time. The market-wide circuit breaker is calculated on the basis of the index movements. The circuit breaker system has not undergone amendments to the different levels at which it gets triggered. This is the reasoning for the study, which aims to investigate whether there is a need for a revision of the mechanism. An exploratory study of the equity markets utilizing an Event Study methodology reveals that circuit breakers are definitely useful towards restraining volatility. The study also shows that investors tend to panic more when the markets show intense movements in the downward direction than in the upward direction.