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

63 Pages Posted: 12 Dec 2017

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

The Vanguard Group, Inc.

Chen Yao

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

Multiple version iconThere are 2 versions of this paper

Date Written: December 2017

Abstract

This paper studies the SEC's pilot program that increased the tick size for approximately 1,200 randomly chosen stocks. We provide causal evidence of a negative impact of a larger tick size on stock prices equivalent to roughly $7 billion investor loss. We investigate direct and indirect effects of the tick size change on stock prices. We find that treated stocks experience a reduction in liquidity, but find no significant change in liquidity risk. Test stocks experience a decline in price efficiency consistent with an increase in information risk. The evidence suggests that trading frictions affect the cost of capital.

Keywords: information risk, investor horizon, JOBS Act, liquidity, liquidity premium, liquidity risk, news response rate, price efficiency, tick size pilot program

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 (December 2017). CEPR Discussion Paper No. DP12486, Available at SSRN: https://ssrn.com/abstract=3086142

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 the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Shiyun Song

The Vanguard Group, Inc. ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

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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