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Circuit Breakers and Financial Contagion

Abstract

Circuit breakers based on indices are commonly imposed in financial markets to reduce market crashes and volatility in bad times. We develop a dynamic equilibrium model with multiple stocks to study how circuit breakers affect joint stock price dynamics and cross-stock contagion. We show that circuit breakers can cause crash contagion, volatility contagion, and high correlations among otherwise independent stocks, especially in bad times. Our analysis suggests that circuit breakers rules might have exacerbated the market plunges and extreme volatility triggered by the COVID-19 pandemic. We propose an alternative circuit breaker approach that does not cause cross-stock contagion.


个人简介:曾旭东,南加州大学金融数学博士,现任上海财经大学金融学院教授,保险系主任。研究方向包括不完全市场上的最优投资组合,金融资产定价,金融数学和保险精算等。已在Management Science, Mathematics of Operations Research, North American Actuarial Journal等金融学、管理学领域领先学术期刊上发表论文多
篇。主持两项国家基金项目。