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

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Author Info
Hau, Harald

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3651.

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Date of creation: Nov 2002
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Handle: RePEc:cpr:ceprdp:3651

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Related research
Keywords: effective spread; realized volatility; tick size; Tobin tax;

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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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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(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. 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:
  2. 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!]
  3. 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:
  4. 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!]
  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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