Decimal Pricing and Information-Based Trading: Tick Size and Informational Efficiency of Asset Price

14 Pages Posted: 13 Aug 2006

See all articles by Xin Zhao

Xin Zhao

Pennsylvania State University (Erie) - The Behrend College

Kee H. Chung

State University of New York at Buffalo - School of Management

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Abstract

In this study we analyze the effect of tick size on information-based trading. Although prior studies provide extensive evidence on the effect of tick size on market quality measures such as spreads, depths, and return volatility, there is little evidence as to the effect of tick size on the informational efficiency of asset price. Our results indicate that the probability of information-based trading during the post-decimal period is significantly greater than the corresponding figure during the pre-decimal period. We also show that the increase in information-based trading after decimalization cannot be attributed to concurrent changes in stock attributes. We interpret our findings as evidence that the smaller tick size under penny pricing encourages information-based trading and thereby raises the informational efficiency of asset price.

Suggested Citation

Zhao, Xin Jessica and Chung, Kee H., Decimal Pricing and Information-Based Trading: Tick Size and Informational Efficiency of Asset Price. Journal of Business Finance & Accounting, Vol. 33, No. 5-6, pp. 753-766, June/July 2006. Available at SSRN: https://ssrn.com/abstract=924045 or http://dx.doi.org/10.1111/j.1468-5957.2006.00622.x

Xin Jessica Zhao

Pennsylvania State University (Erie) - The Behrend College ( email )

286 Burke
Erie, PA 16563-1400
United States

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

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