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The Role of Transaction Costs for Financial Volatility: Evidence from the Paris Bourse

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Author Info
Harald Hau

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Abstract

This paper analyzes the causal linkage between transaction costs and financial volatility under two methodological improvements over the existingliterature. First, we use panel data in which exogenous transaction cost differences in the French stock market are induced by price level dependentminimum price variation rules (tick size rules). Unlike in previous studies based on one-time regulatory tick size changes (like the U.S.decimalization), we can separately identify and control for marketwide volatility changes. Second, we avoid the pitfalls of biased volatilitymeasurement across regimes by using the range as a tick size robust volatility metric. Panel regressions controlling for marketwide volatilityeffects show at high levels of statistical significance that the hourly range volatility of individual stocks increases by more than 30% for a 20%exogenous increase in transaction costs due to tick size variations in the French trading system. In the light of this evidence, higher transactioncosts in general, and security transaction taxes in particular, should be considered as volatility increasing.(JEL: F3, G1, G14) Copyright (c) 2006 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 4 (2006)
Issue (Month): 4 (06)
Pages: 862-890
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Handle: RePEc:tpr:jeurec:v:4:y:2006:i:4:p:862-890

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  8. Lau, Sie Ting & McInish, Thomas H., 1995. "Reducing tick size on the Stock Exchange of Singapore," Pacific-Basin Finance Journal, Elsevier, vol. 3(4), pages 485-496, December. [Downloadable!] (restricted)
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  19. Bacidore, Jeffrey M., 1997. "The Impact of Decimalization on Market Quality: An Empirical Investigation of the Toronto Stock Exchange," Journal of Financial Intermediation, Elsevier, vol. 6(2), pages 92-120, April. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mende, Alexander & Menkhoff, Lukas, 2003. "Tobin Tax Effects Seen from the Foreign Exchange Market's Microstructure," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-268, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
    Other versions:
  2. Michael Hanke & Jürgen Huber & Michael Kirchler & Matthias Sutter, 2007. "The economic consequences of a Tobin tax - An experimental analysis," Working Papers 2007-18, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
  3. Paolo Pelizzari & Frank Westerhoff, 2007. "Some Effects of Transaction Taxes Under Different Microstructures," Research Paper Series 212, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
    Other versions:
  4. Martins-da-Rocha, V. F. & Vailakis, Yiannis, 2008. "Endogenous Transaction Costs," Economics Working Papers (Ensaios Economicos da EPGE) 680, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  5. Décamps, Jean-Paul & Mariotti, Thomas & Rochet, Jean-Charles & Villeneuve, Stéphane, 2008. "Free Cash-Flow, Issuance Costs and Stock Price Volatility," IDEI Working Papers 518, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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