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Decimal Pricing and Information‐Based Trading: Tick Size and Informational Efficiency of Asset Price
Author(s) -
Zhao Xin,
Chung Kee H.
Publication year - 2006
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2006.00622.x
Subject(s) - tick size , decimal , stock (firearms) , volatility (finance) , financial economics , asset (computer security) , capital asset pricing model , economics , econometrics , trading strategy , business , monetary economics , market liquidity , computer science , mathematics , arithmetic , mechanical engineering , computer security , engineering
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.