Tick Size Reduction and Liquidity Dimensions: Evidence from an Emerging Market

The paper presents an analysis of the tick size adjustment on an order-driven market in an emerging country. The Vietnamese stock market introduces a new tick size system that sets four different tick sizes based on the stock price on 12 September 2016. Researchers argue that multidimensional aspects characterize market liquidity. The article classifies three dimensions of market liquidity: tightness, depth, and resilience. The study investigates the variation of liquidity dimensions following the changes in a minimum tick size on the Vietnamese stock market. The paper employs seven liquidity measures to proxy for three liquidity dimensions: quoted spread, effective spread, trading volume, trading value, Amihud (2002) measure, turnover ratio, and market efficiency coefficient. Using the Wilcoxon signed-rank test, the study examines the difference in liquidity proxies between the pre- and post-periods. The empirical evidence illustrates that tightness dimensions decline significantly during the post-periods. The proxies of the depth and resilience dimensions illustrate greater illiquidity following a reduction in tick size.