Tick size change and liquidity provision for Japanese stock trading near Y1000

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Author(s)

  • Jun Cai
  • Yasushi Hamao
  • Richard Y. K. Ho

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)19-39
Number of pages21
Journal / PublicationJapan and the World Economy
Volume20
Issue number1
Publication statusPublished - Jan 2008

Abstract

Bessembinder [Bessembinder, H., 2000. Tick size, spreads, and liquidity: an analysis of NASDAQ securities trading near ten dollars, Journal of Financial Intermediation 9, 213-239] examines the effect of tick size changes from US$ 1/32 to US$ 1/8 on NASDAQ stocks when the stockprices pass US$ 10. In contrast with NASDAQ, the Tokyo Stock Exchange (TSE) strictly enforces the price and time precedence rule. The TSE is also one of the largest limit-order markets using a tick size that is a step function of share price. The threshold, at Y1000, is the most important among several other price levels. The minimum tick size increases from Y1 to Y10 when stock prices rise from below Y1000 to above Y1000. This large change in tick size and its effects on market quality have interested researchers for a long time [Amihud, Y., Mendelson, H. 1991. Volatility, efficiency and trading: evidence from the Japanese stock market, Journal of Finance 46,1765-1789; Harris, L., 1994. Minimum price variations, discrete bid-ask spreads, and quotation sizes, Review of Financial Studies 7, 149-178], but they have never been examined. This study considers the impact of the change in minimum tick size on liquidity provisions as TSE stock prices cross the Y1000 threshold. The empirical results provide some new insights regarding the effects of endogenous tick size changes. (C) 2006 Elsevier B.V. All rights reserved.

Research Area(s)

  • tick size change, quoted spread, effective spreads, spread clustering, trading volume, MARKET QUALITY, VOLATILITY, RETURNS, SIXTEENTHS, VARIANCE, EXCHANGE, SPREADS, SPLITS, PRICES