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The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment

Rui Albuquerque, Shiyun Song and Chen Yao

No 12486, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: information risk; investor horizon; JOBS Act; liquidity; liquidity premium; liquidity risk; news response rate; price efficiency; tick size pilot program (search for similar items in EconPapers)
JEL-codes: G10 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-mst
Date: 2017-12
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