The Effects of Tick Size, Trading Frequency and Delay-open on the Return Dynamics in Taiwan's Stock Market

This paper examines the effects of three market microstructure factors: tick size, trading frequency, and delay-open, on the return dynamics in Taiwan's stock market. The major results are as follows. First, the result shows that for the tick size portfolios without adjusting for the price level, it is consistent with the transaction cost hypothesis based on the absolute dollar tick sizes. That is, the stocks with smaller absolute tick sizes tend to adjust information faster than stocks with larger absolute tick sizes. After considering the price level, we find that both the absolute dollar tick size and the relative tick size contribute to the return dynamics. Second, the returns of stocks with higher trading frequency lead those with lower trading frequency. This implies that non-synchronous trading is not only a major determinant for the daily or weekly return cross-correlation as evidenced in the literature, but it also plays an important role in the intra-day return dynamics. That is, even when all of the stocks are traded every day, the speed of information compounded into prices will be different as long as there are some stocks traded more frequently than others. Finally, the returns of stocks with delay-open time within 90 seconds lead those with delay-open time over 90 seconds. However, for the stocks with delay-open time within 90 seconds, there exists no uni-directional lead-lag pattern. Since the trading mechanism set by Taiwan Stock Exchange (TSE) is such that for every 90 seconds, there will be at least one matching for each stock, the above result implies that the institutional arrangement does not induce the return lead-lag pattern.