The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment

68 Pages Posted: 7 Dec 2017 Last revised: 16 May 2019

See all articles by Rui A. Albuquerque

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Shiyun Song

University of Warwick - Warwick Business School

Chen Yao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Multiple version iconThere are 2 versions of this paper

Date Written: May 14, 2019

Abstract

Do stock prices of publicly listed companies respond to changes in transaction costs? Using the SEC’s pilot program that increased the tick size for approx- imately 1,200 randomly chosen stocks, we find a stock price decrease between 1.75% and 3.2% for small spread stocks affected by the larger tick size relative to a control group. We find that the increase in the present value of transaction costs accounts for a small percentage of the price decrease. We study channels of price variation due to changes in expected returns: information risk, investor horizon, and liquidity risk. The evidence suggests that trading frictions affect the cost of capital.

Keywords: Tick Size Pilot Program, Liquidity, Price Efficiency, News Response Rate, Liquidity Risk, Liquidity Premium, Information Risk, Investor Horizon, JOBS Act

JEL Classification: G10, G14

Suggested Citation

Albuquerque, Rui A. and Song, Shiyun and Yao, Chen, The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment (May 14, 2019). Available at SSRN: https://ssrn.com/abstract=3081125 or http://dx.doi.org/10.2139/ssrn.3081125

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Shiyun Song

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Chen Yao

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
Shatin, N.T.
Hong Kong
852 39433215 (Phone)

HOME PAGE: http://sites.google.com/site/chenyaosite/research

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