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The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment
2018-03-26 09:19:14
by Yao Chen, The Chinese University of Hong Kong

Wednesday, March 28, 2018 | 2:00pm-3:30pm | Room 335, HSBC Business School Building


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.