6533b7d5fe1ef96bd1265148

RESEARCH PRODUCT

How Tick Size Affects the High Frequency Scaling of Stock Return Distributions

subject

description

We study the high frequency scaling of the distributions of returns for stocks traded at NASDAQ market as a function of the tick-to-price ratio. The tick-to-price ratio is a measure of an effective tick size. We find dramatic differences between distributions for assets with large and small tick-to-price ratio. The presence of returns clustering is evident for large tick size assets. The statistical differences between large and small tick size assets appear to reduce at higher time scales of observation. A possible way to explain returns dynamics for large tick size assets is the coupling of returns with bid-ask spread dynamics. A simple Markov- switching model is able to reproduce the properties of the distribution of returns for large tick size assets.