The Impact of Minimum Trading Units on Stock Value and Price Volatility

Abstract

We study how minimum trading unit changes on the Tel-Aviv Stock Exchange impact stock trading activity, price volatility and value. The value effects are consistent with Merton (1987)'s model, that is an increase in the investor base (trading volume) and a decrease in price noisiness affect stock value positively. Our results extend Amihud Mendelson and Uno (1999)'s tests of Melson (1987) by demonstrating a clear relation between price noisiness changes and stock value changes, and by showing that the response to a minimum trading unit decrease becomes less favorable (and arguably even negative) in the thinnest trading stocks.

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