The Effects of Decimalization on Return Volatility Components, Serial Correlation and Trading Costs

Posted: 6 Apr 2004

See all articles by Yan He

Yan He

Indiana University Southeast - School of Business

Chunchi Wu

SUNY at Buffalo - School of Management

Abstract

We examine the composition of return volatility, serial correlation, and trading costs before and after decimalization on the New York Stock Exchange. We decompose the variance of price changes into components associated with public news, rounding errors, and market-making frictions. We find that when stocks move from a fractional to a decimal trading system, the variance components due to market-making frictions and rounding errors decline significantly, whereas the component due to public news remains unchanged. The serial correlation of price changes weakens substantially after decimalization. The uninformed component of bid-ask spreads decreases significantly whereas the informed component has no significant change.

Keywords: Decimalization, volatility components, microstructure

JEL Classification: G1

Suggested Citation

He, Yan and Wu, Chunchi, The Effects of Decimalization on Return Volatility Components, Serial Correlation and Trading Costs. Available at SSRN: https://ssrn.com/abstract=524942

Yan He

Indiana University Southeast - School of Business ( email )

4201 Grant Line Road
New Albany, IN 47150
United States
812-941-2308 (Phone)
812-941-2672 (Fax)

Chunchi Wu (Contact Author)

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

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