Decimal Pricing and Information-Based Trading: Tick Size and Informational Efficiency of Asset Price
In this study we analyze the effect of tick size on information-based trading. Although prior studies provide extensive evidence on the effect of tick size on market quality measures such as spreads, depths, and return volatility, there is little evidence as to the effect of tick size on the informational efficiency of asset price. Our results indicate that the probability of information-based trading during the post-decimal period is significantly greater than the corresponding figure during the pre-decimal period. We also show that the increase in information-based trading after decimalization cannot be attributed to concurrent changes in stock attributes. We interpret our findings as evidence that the smaller tick size under penny pricing encourages information-based trading and thereby raises the informational efficiency of asset price. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.
Year of publication: |
2006-06
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Authors: | Zhao, Xin ; Chung, Kee H. |
Published in: |
Journal of Business Finance & Accounting. - Wiley Blackwell, ISSN 0306-686X. - Vol. 33.2006-06, 5-6, p. 753-766
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Publisher: |
Wiley Blackwell |
Saved in:
freely available
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