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

Author(s): Rui Albuquerque, Shiyun Song and Chen Yao

Publication Date: December 2017

Keyword(s): information risk, investor horizon, JOBS Act, liquidity, liquidity premium, liquidity risk, news response rate, price efficiency and tick size pilot program

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Albuquerque, R, Song, S and Yao, C. 2017. 'The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment'. London, Centre for Economic Policy Research. https://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12486