Essays on Taiwan Stock Market: Synchronous Movement and Tick Size Reduction

• Main Authors: Li-Che Huang, 黃理哲
• Other Authors: Yung-Jang Wang
• Format: Others
• Language: en_US
• Published: 2010
• Online Access: http://ndltd.ncl.edu.tw/handle/03018316263571421306

博士 === 國立中正大學 === 財務金融所 === 98 === This study contains two essays which address the effects of synchronous movement and tick size reduction in Taiwan Stock Market. Because the stock market is full of frictions and irrational investors, and the trade system is adjusted by the authorities, market anomalies and performances may be influenced by the above elements. Essay 1 focuses on observing whether the synchronous movement effects of stock returns are different between bull and bear markets over long periods of time. Additionally, the Taiwan Stock Exchange followed foreign stock exchanges to reduce tick sizes and this adjustment of the trade system was only done once. Essay 2 focuses on surveying whether the market performances are improved after reduction. Essay 1 examines the synchronous movement effects of various stock groups during different periods in Taiwan Stock Market. The research period is from 1996 to 2008 (covering nearly 13 years) and includes five stock market cycles. The empirical evidence indicates that the returns of the large and small size, high price, high growth, high profit and strong financial credit stock groups move up together during the initial period of bull markets, while the returns of the small size, low price, low growth, low profit and weak financial credit stock groups move up together during the final period of bull markets. Furthermore, in a bear market, the returns of the small size, low growth, high and low profit stock groups move down together during the initial period, and the returns of the large size, high price, high growth, strong and weak financial credit stock groups move down together during the final period. As such, the synchronous movement effects of stock returns are different during the initial and final periods of bull and bear markets. These analytical results imply that investor herding behavior is inconsistent in the bull and bear markets. In essay 2, we explore the tick size reduction effect of market performance in Taiwan Stock Market. Our empirical results suggest that the reduction in tick size leads to a narrower bid-ask spread, declined quotation sizes and results in a significant decline in the market quality index which lowers the market liquidity. This study finds that price variation was not affected significantly by tick size reduction. That is, the adjustment of tick size does not affect market volatility. However, the regression coefficient of the swing increases significantly in OLS and fixed effect models, indicating that the profit opportunity for scalpers is not impacted by the adjustment. In both time-series and cross-sectional analyses, execution cost decreases significantly following tick size reduction, indicating that such reduction on the Taiwan Stock Exchange facilitates an overall improvement in market efficiency.