The AMEX changed the tick size from[formula]to[formula]for low-price stocks on September 3, 1992. Consistent with the prediction of L. E. Harris (1994, Minimum price variations, discrete bid–ask spreads, and quotation sizes,Rev. Finan. Stud.7,149–178), the change has reduced both quoted and effective spreads, although the magnitude of the reduction is much smaller than predicted. However, we fail to find evidence of a significant increase in trading volume. Our cross-sectional regressions show that stocks with greater trading activity, lower prices, and stronger competition from the regional exchanges experienced greater spread reductions.Journal of Economic LiteratureClassification Numbers: G10, G18, G20.

[While recent studies document increasing idiosyncratic volatility over the past four decades, an explanation for this trend remains elusive. We establish a theoretical link between growth options available to managers and the idiosyncratic risk of equity. Empirically both the level and variance of corporate growth options are significantly related to idiosyncratic volatility. Accounting for growth options eliminates or reverses the trend in aggregate firm-specific risk. These results are robust for different measures of idiosyncratic volatility, different growth option proxies, across exchanges, and through time. Finally, our results suggest that growth options explain the trend in idiosyncratic volatility beyond alternative explanations.]

This article empirically analyzes some properties shared by all one-dimensional diffusion option models. Using S&P 500 options, we find that sampled intraday (or interday) call (put) prices often go down (up) even as the underlying price goes up, and call and put prices often increase, or decrease, together. Our results are valid after controlling for time decay and market microstructure effects. Therefore one-dimensional diffusion option models cannot be completely consistent with observed option price dynamics; options are not redundant securities, nor ideal hedging instruments-puts and the underlying asset prices may go down together.

We test the hypothesis that insider trading impairs market liquidity by analyzing intraday trades and quotes around 1,497 IPO lockup expirations in the period 1995–1999. We find that, while lockup expirations are associated with considerable insider trading for some IPO firms, they have little effect on effective spreads. By contrast, two other liquidity measures, quote depth and trading activity, improve substantially. In the 23% of lockup expirations where insiders disclose share sales, spreads actually decline. These findings indicate that a large body of well-informed, blockholding insider traders can enter a market from which they had previously been absent, and substantially change trading volume and share price without impairing market liquidity.

This paper examines the impact of share repurchase tender offers on the market microstructure. We find that there is a temporary reduction in the bid–ask spread, and a temporary increase in volume and quotation depth during the offer period. Our evidence suggests that the bid–ask spread is asymmetric during the offer period with the bid-side spread smaller than the ask-side spread. The temporary reduction in the spread around offers is consistent with the competing-market-maker hypothesis which predicts that the intensified competition for the market maker raises bid prices and narrows the spread asymmetrically during the offer period.

This paper studies Nasdaq market makers' activities during the one and one‐half hour preopening period. Price discovery during the preopening is conducted via price signaling as opposed to the auction used to open the NYSE or the continuous market used during trading. In the absence of trades, Nasdaq dealers use crossed and locked inside quotes to signal to other market makers which direction the price should move. Furthermore, we find evidence of price leadership among market makers that bears little resemblance to their IPO/SEO lead underwriter participation.

This article tests for differences in execution costs among specialist firms for New York Stock Exchange listed securities. Execution cost differences provide a measure of the relative performance of specialist firms. We find a substantial difference in effective spreads and order processing costs across specialist firms, controlling for stock characteristics. While economically significant, the differences in execution costs between specialist firms are much smaller than the cross‐market differences reported by Huang and Stoll (1996). Within a specialist firm, there is a positive relation between order processing costs and trading activity that is consistent with the hypothesis that active stocks subsidize inactive stocks.

Substantial progress has been made in developing more realistic option pricing models. Empirically, however, it is not known whether and by how much each generalization improves option pricing and hedging. The authors fill this gap by first deriving an option model that allows volatility, interest rates, and jumps to be stochastic. Using S&P 500 options, they examine several alternative models from three perspectives: (1) internal consistency of implied parameters/volatility with relevant time-series data, (2) out-of-sample pricing, and (3) hedging. Overall, incorporating stochastic volatility and jumps is important for pricing and internal consistency. But for hedging, modeling stochastic volatility alone yields the best performance.