Tick size and stock returns

Onnela, Jukka-Pekka, Toyli, J and Kaski, Kimmo (2009) Tick size and stock returns. Physica A: Statistical Mechanics and its Applications, 388 (4). p. 441.

Abstract

Tick size is an important aspect of the micro-structural level organization of financial
markets. It is the smallest institutionally allowed price increment, has a direct bearing
on the bid–ask spread, influences the strategy of trading order placement in electronic
markets, affects the price formation mechanism, and appears to be related to the long-term
memory of volatility clustering. In this paper we investigate the impact of tick size on stock
returns.Westart with a simple simulation to demonstrate how continuous returns become
distorted after confining the price to a discrete grid governed by the tick size.Wethen move
on to a novel experimental set-up that combines decimalization pilot programs and crosslisted
stocks in New York and Toronto. This allows us to observe a set of stocks traded
simultaneously under two different ticks while holding all security-specific characteristics
fixed. We then study the normality of the return distributions and carry out fits to the
chosen distribution models. Our empirical findings are somewhat mixed and in some cases
appear to challenge the simulation results.

Item Type: Article
Citations: Web of Science: 2
Keywords: Tick size; stock returns; micro-structural level
Subject(s): Complexity
Science & technology management
Centre: CABDyN Complexity Centre
Institute for Science, Innovation and Society
Related URLs:
Date Deposited: 16 Jun 2010 09:27
Last Modified: 23 Oct 2015 14:05
URI: http://eureka.sbs.ox.ac.uk/id/eprint/242

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