Impact of Tick Size Reduction on Liquidity Index in Tokyo Stock Exchange

Abstract

Tick size is minimum price unit which investors buy or sell stock shares in stock market. Tick size is reduced with the aim of improving liquidity. Liquidity means how easily investors buy or sell stock shares. Tokyo Stock Exchange (TSE) introduced new tick size rules twice in 2014. In phase 1 (P1), it enforced on January 14th, 2014. In phase 2 (P2), it enforced on July 22nd, 2014. Actually, liquidity is measured liquidity measures. Danyliv, Bland, and Nicholass proposed new liquidity measure, Liquidity Index (LIX). This is the relationship between price change and trading volume. It shows how much the stock price is moved by trading. As for LIX, there is no study of the impact of tick size reduction. And in previous study, Purwoto and Tandelilin showed the relationship between stock price and liquidity measure when tick size was reduced. Bessembinder also showed the relationship between market value and liquidity measure when tick size was reduced. Additionally, Amihud showed the relationship between stock return and illiquidity. So, in this paper, we have following two research purposes. First, we investigate how much tick size reduction impacts on LIX. Second, we investigate how much stock price, market value, and stock return affect LIX when tick size is reduced. As a result, we got following three results. First, tick size reduction increase LIX in P1, and decrease in P2. Second, there is interaction effect of tick size reduction and stock price in P2. Third, there is interaction effect of tick size reduction and stock return.