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

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.