Working Paper: CEPR ID: DP3651
Authors: Harald Hau
Abstract: Minimum price variation rules (tick size rules) in the French stock market prior to 1999 provide a natural experiment on the role of transaction costs for financial price volatility. For stock prices above French francs (FF) 500, the minimal tick size for quotes increases from FF 0.1 to FF 1. This tick size increase generates a 20% higher median effective spread and therefore artificially inflates transaction costs. Using the range of the quoted mid-price as a tick size robust volatility metric, we calculate 47,213 hourly volatility measures for all CAC40 stocks in the price range from FF 400 to FF 600 and measure the volatility impact of the transaction cost increase at FF 500. We find that the median hourly range volatility is approximately 16% higher in the high cost regime. Panel regressions confirm this result at a high level of statistical significance. In the light of this evidence, higher transaction costs in general, and security transaction taxes in particular, should be considered as volatility increasing.
Keywords: Effective spread; Realized volatility; Tick size; Tobin tax
JEL Codes: F30; G10; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tick size regulation (G18) | Higher transaction costs due to higher tick sizes (G19) |
| Higher transaction costs due to higher tick sizes (G19) | Increased median effective spread difference on days of low market-wide volatility (G14) |
| Higher transaction costs due to higher tick sizes (G19) | Increased stock price volatility (G19) |
| Tick size regulation (G18) | Increased stock price volatility (G19) |