Tick Size: Theory and Evidence

Ingrid M. Werner, Yuanji Wen, Barbara Rindi, Francesco Consonni and Sabrina Buti
Additional contact information
Ingrid M. Werner: OH State University
Yuanji Wen: University of Western Australia
Barbara Rindi: Bocconi University
Francesco Consonni: Bocconi University
Sabrina Buti: University of Toronto

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We model a public limit order book where rational traders decide whether to demand or supply liquidity, and where liquidity builds endogenously. The model predicts that a reduction of the tick size will cause spreads and welfare to deteriorate for illiquid but improve for liquid books. We find empirical support for these predictions based on European and U.S. data. The model also generates predictions for volume, but we find less empirical support for these predictions which we attribute to opportunistic High-Frequency-Traders selectively entering the market.

JEL-codes: G10 G12 G14 G18 G20 (search for similar items in EconPapers)
Date: 2015-03
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-mst
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2015-04

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