DP12486 The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment

Author(s):	Rui Albuquerque, Shiyun Song, Chen Yao
Publication Date:	December 2017
Keyword(s):	information risk, investor horizon, JOBS Act, liquidity, liquidity premium, liquidity risk, news response rate, price efficiency, tick size pilot program
JEL(s):	G10, G14
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=12486

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.