Circuit Breakers, Signaling and Overreaction: A Case of Pakistan Stock Exchange
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This study aims to shed light on the post event impact of circuit breakers on investors’ behavior. The study has used daily stock returns and instances of circuit breakers being hit for the largest 30 stocks of the PSE for a period spanning 7 years and 10 months. Ordinary Least Squares (OLS) regression analysis was applied to the daily stock returns and the one day lagged value of the circuit breaker instances variable. The results showed that on average, the stock exhibited 7.43% return (1.48 times the circuit breakers threshold for the sample stocks) on a trading day, following an instance of a circuit breaker being engaged, and more importantly this return was in the same direction as that of the circuit breaker causing it. The investors’ response to negative circuit breakers is not significantly (statistically speaking) greater in magnitude than those of positive circuit breakers would have as per results of the prospect theory. The results further reveal that the disposition effect does indeed manifest itself in the trading volume of scrips when circuit breakers are hit.Abstract
This study aims to shed light on the post event impact of circuit breakers on investors’ behavior. The study has used daily stock returns and instances of circuit breakers being hit for the largest 30 stocks of the PSE for a period spanning 7 years and 10 months. Ordinary Least Squares (OLS) regression analysis was applied to the daily stock returns and the one day lagged value of the circuit breaker instances variable. The results showed that on average, the stock exhibited 7.43% return (1.48 times the circuit breakers threshold for the sample stocks) on a trading day, following an instance of a circuit breaker being engaged, and more importantly this return was in the same direction as that of the circuit breaker causing it. The investors’ response to negative circuit breakers is not significantly (statistically speaking) greater in magnitude than those of positive circuit breakers would have as per results of the prospect theory. The results further reveal that the disposition effect does indeed manifest itself in the trading volume of scrips when circuit breakers are hit.
