THE EFFECTS OF DECIMALIZATION ON RETURN VOLATILITY COMPONENTS, SERIAL CORRELATION, AND TRADING COSTS

THE EFFECTS OF DECIMALIZATION ON RETURN VOLATILITY COMPONENTS, SERIAL CORRELATION, AND TRADING COSTS We examine the composition of return volatility, serial correlation, and trading costs before and after decimalization on the New York Stock Exchange. We decompose the variance of price changes into components associated with public news, rounding errors, and market‐making frictions. We find that when stocks move from a fractional to a decimal trading system, the variance components due to market‐making frictions and rounding errors decline significantly, whereas the component due to public news remains unchanged. The serial correlation of price changes weakens substantially after decimalization. The uninformed component of bid‐ask spreads decreases significantly whereas the informed component has no significant change. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Financial Research Wiley

THE EFFECTS OF DECIMALIZATION ON RETURN VOLATILITY COMPONENTS, SERIAL CORRELATION, AND TRADING COSTS

The Journal of Financial Research, Volume 28 (1) – Mar 1, 2005

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Publisher
Wiley
Copyright
Copyright © 2005 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0270-2592
eISSN
1475-6803
D.O.I.
10.1111/j.1475-6803.2005.00115.x
Publisher site
See Article on Publisher Site

Abstract

We examine the composition of return volatility, serial correlation, and trading costs before and after decimalization on the New York Stock Exchange. We decompose the variance of price changes into components associated with public news, rounding errors, and market‐making frictions. We find that when stocks move from a fractional to a decimal trading system, the variance components due to market‐making frictions and rounding errors decline significantly, whereas the component due to public news remains unchanged. The serial correlation of price changes weakens substantially after decimalization. The uninformed component of bid‐ask spreads decreases significantly whereas the informed component has no significant change.

Journal

The Journal of Financial ResearchWiley

Published: Mar 1, 2005

References

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