Tick sizes and relative rates of price discovery in stock, futures, and options markets: Evidence from the Taiwan stock exchange

Abstract

This study examines the competition in price discovery among stock index, index futures, and index options in Taiwan. The price-discovery ability of the Taiwan Top 50 Tracker Fund, an exchange-traded fund based on the Taiwan 50 index is examined. The authors find that, after the minimum tick size in the stock market decreases, the bid-ask spreads of the component stocks of the stock index and the Taiwan Top 50 Tracker Fund get lower, and the contribution of the spot market to price discovery increases.

Intraday price discovery and volatility transmission in stock index and stock index futures markets: Evidence from China

“…Cabrera, Wang, & Yang, 2009;Chen & Gau, 2010;Rosenberg & Traub, 2009), where currency cash markets overshadows currency futures markets in the size and trading volume and thus take the leading role in price discovery. Furthermore, this finding is also in line with that of Chen and Gau (2009), who show that the stock index contributes more to price discovery than index futures and index options in Taiwan. In addition, the results indicate strong bidirectional intraday volatility dependence in these two markets, suggesting that the volatility originated in either the Chinese stock or futures markets would transmit to the other.…”

One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations

“…We present the set of studies in Table 8. The empirical literature agrees that a decrease in the minimum tick size enhances the price discovery process (Chen and Gau 2009;Beaulieu et al 2003 and. In particular, Beaulieu et al (2003) and Chou and Chung (2006) also document an increased participation of funds in the price discovery process following a decrease in the minimum tick size.…”

Tick Size Reduction and Price Discovery in Option Markets: An Empirical Investigation

“…Our IS results in Table 4.6 for the options of the four ETFs are also lower than those of Chen and Gau (2009) for the options on the Taiwan index-tracking fund for the LIV inversion method, but the difference is not as large as in the comparison with CGM for equities. The HI inversion method makes the options' IS metric comparable or higher than that of Chen and Gau.…”

“…Although there are several empirical studies on the impact of tick size reduction on price discovery in derivatives markets, only one of them, by Chen and Gau (2009), examined the role of options in this discovery. The authors use the CGM methodology for the inversion of the option price and examine the impact on the IS metric before and after the tick size reduction in the underlying Taiwan index tracking fund.…”

“…They attribute this finding to the lower transaction costs in the tracking fund induced by the smaller tick size. In addition to the new inversion methods and their impact on price discovery, our study provides the following empirical contributions over and above those of Chen and Gau (2009). First, we provide a framework for an in depth analysis of the variability of information shares.…”