Realized volatility, price informativeness, and tick size: A market microstructure approach

Xijuan Xiao and Ryuichi Yamamoto

International Review of Economics & Finance, 2024, vol. 89, issue PA, 410-426

Abstract: This study examines the effects of tick size reduction on price volatility and microstructure noise terms embedded in stock prices. Comparing the realized variances and microstructure noise autocovariance before and after the tick size reduction and stock split, it is found that a smaller tick size induces a significant decline in price fluctuations at a 1-min frequency. Regressing the realized variances and microstructure noise autocovariance against trading activities, it is found that the decrease in the execution of large trades due to tick size reduction is primarily accountable for the shrinkage in price volatility. This effect exceeds the increase in the number of small trades that introduce higher price volatility. A less tick-constrained environment encourages order splitting, alleviates order clustering, weakens microstructure noise contamination, lowers its role in price variation, and thus improves price informativeness.

Keywords: Realized volatility; Price informativeness; Microstructure noise; Tick size reduction; Stock split (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:89:y:2024:i:pa:p:410-426

DOI: 10.1016/j.iref.2023.07.109

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