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Does Price Discreteness Affect the Increase in Return Volatility Following Stock Splits?

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  • Dan W. French
  • Taylor W. Foster, III

Abstract

Stock return volatility tends to increase significantly following stock splits. One potential cause of this is the trading of stocks in discrete price intervals called ticks. This study provides a direct test of price discreteness as a determinant of this phenomenon by examining variance increases before and after the 1997 date when the exchanges reduced the tick size from 1/8 to 1/16. Results generally show that the post‐split variance increase was unaffected by the reduction in tick size even after controlling for other factors. AMEX stocks proved the exception, with slightly lower variance increases following the tick size reduction.

Suggested Citation

  • Dan W. French & Taylor W. Foster, III, 2002. "Does Price Discreteness Affect the Increase in Return Volatility Following Stock Splits?," The Financial Review, Eastern Finance Association, vol. 37(2), pages 281-293, May.
    • Handle: RePEc:bla:finrev:v:37:y:2002:i:2:p:281-293
    DOI: 10.1111/1540-6288.00015
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    Cited by:

    1. Thanos Verousis & Pietro Perotti & Georgios Sermpinis, 2018. "One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 353-392, February.
    2. Chaudhry, Sajid M. & Bajoori, Elnaz & Nandeibam, Shasi, 2019. "Clustered pricing in the corporate loan market: Theory and empirical evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 275-296.
    3. Chen, Chun-nan & Wu, Chunchi, 2009. "Small trades and volatility increases after stock splits," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 592-610, October.
    4. José Yagüe & J. Gómez-Sala, 2005. "Price and tick size preferences in trading activity changes around stock split executions," Spanish Economic Review, Springer;Spanish Economic Association, vol. 7(2), pages 111-138, June.
    5. Roger, Tristan & Roger, Patrick & Schatt, Alain, 2018. "Behavioral bias in number processing: Evidence from analysts’ expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 149(C), pages 315-331.

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