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|
|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.