Transaction Costs and Price Volatility: Evidence from Commission Deregulation

Posted: 10 Oct 1998

See all articles by Charles M. Jones

Charles M. Jones

Columbia Business School

Paul J. Seguin

University of Minnesota - Twin Cities - Carlson School of Management

Abstract

Some researchers have recently suggested that lower transaction costs induce small (or noise) traders to trade more actively, thus increasing both the noise component and total volatility of asset prices. We empirically evaluate this conjecture by examining changes in volatility surrounding the abolition in 1975 of fixed brokerage fees on the NYSE. We use a control sample of NASDAQ issues that are unaffected by the abolition. Using a variety of tests, we find that the lowering of transaction costs is associated with a significant reduction in volatility for the aggregate NYSE portfolio and five size-ranked portfolios, even after accommodating market-wide conditional heteroskedasticity. In addition, prices are better characterized as random walks following the fixed fee abolition, a result that is due to a lower noise component in returns and more rapid price adjustment. We conclude that an increase in transaction costs could lead to higher volatility and less-informative prices.

JEL Classification: G12, G14, H23

Suggested Citation

Jones, Charles M. and Seguin, Paul J., Transaction Costs and Price Volatility: Evidence from Commission Deregulation. Available at SSRN: https://ssrn.com/abstract=6428

Charles M. Jones (Contact Author)

Columbia Business School ( email )

3022 Broadway
Uris Hall Rm 101
New York, NY 10027
United States
(212) 854-4109 (Phone)

HOME PAGE: http://https://www8.gsb.columbia.edu/cbs-directory/detail/cj88

Paul J. Seguin

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
(612) 626-7861 (Phone)

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