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| Author: | Hau, H. |
| Title: | The role of transaction costs for financial volatility: evidence from the Paris Bourse |
| Journal: | Journal of the European Economic Association
2006 : JUN, VOL. 4:4, p. 862-890 |
| Index terms: | transaction costs volatility |
| Language: | eng |
| Abstract: | This article investigates the causal link between transaction costs and financial volatility under two methodological improvements over the existing literature. First, the authors use panel data in which exogenous transaction cost differences in the French stock market are induced by price level dependent minimum price variation rules. Unlike in previous studies based on one-time regulatory tick size changes, this study can separately identify and control for marketwide volatility changes. Second, this paper avoids the pitfalls of biased volatily measurement across regimes by using the range as a tick size robust volatility metric. Panel regressions controlling for marketwide volatility effects 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. |
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