| Abstract: |
The prevention of rapidly and steeply falling market prices is vital to avoid
financial crisis. To this end, some stock exchanges implement a price limit or
a circuit breaker, and there has been intensive investigation into which
regulation best prevents rapid and large variations in price. In this study,
we examine this question using an artificial market model that is an
agent-based model for a financial market. Our findings show that the price
limit and the circuit breaker basically have the same effect when the
parameters, limit price range and limit time range, are the same. However, the
price limit is less effective when limit the time range is smaller than the
cancel time range. With the price limit, many sell orders are accumulated
around the lower limit price, and when the lower limit price is changed before
the accumulated sell orders are cancelled, it leads to the accumulation of
sell orders of various prices. These accumulated sell orders essentially act
as a wall against buy orders, thereby preventing price from rising. Caution
should be taken in the sense that these results pertain to a limited
situation. Specifically, our finding that the circuit breaker is better than
the price limit should be adapted only in cases where the reason for falling
prices is erroneous orders and when individual stocks are regulated. |