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A substitution effect between price clustering and size clustering in credit default swaps

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  • Meng, Lei
  • Verousis, Thanos
  • ap Gwilym, Owain

Abstract

In a perfectly liquid market, investors’ optimal allocation decisions refer to maximizing all three dimensions of liquidity, namely immediacy, width and depth. To the extent that investors fail to accommodate size (depth) along with price (width) in their optimal allocation decisions, their overall costs may increase. This paper focuses on the substitution of width and depth by investigating the simultaneous determination of price clustering and size clustering in the credit default swap (CDS) market. We report strong evidence that when traders round prices they tend to quote more refined sizes, and vice versa. The findings highlight a clear trade-off between price clustering and notional amount in the CDS market, and contribute to the emerging literature on size clustering.

Suggested Citation

  • Meng, Lei & Verousis, Thanos & ap Gwilym, Owain, 2013. "A substitution effect between price clustering and size clustering in credit default swaps," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 139-152.
    • Handle: RePEc:eee:intfin:v:24:y:2013:i:c:p:139-152
    DOI: 10.1016/j.intfin.2012.11.011
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    4. Vladim'ir Hol'y & Petra Tomanov'a, 2021. "Modeling Price Clustering in High-Frequency Prices," Papers 2102.12112, arXiv.org, revised Mar 2021.
    5. Berk, Ales S. & Cummins, Mark & Dowling, Michael & Lucey, Brian M., 2017. "Psychological price barriers in frontier equities," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 49(C), pages 1-14.
    6. Christos Alexakis & Mark Cummins & Michael Dowling & Vasileios Pappas, 2018. "A high-frequency analysis of price resolution and pricing barriers in equities on the adoption of a new currency," Applied Economics, Taylor & Francis Journals, vol. 50(36), pages 3949-3965, August.
    7. Garvey, Ryan & Wu, Fei, 2014. "Clustering of intraday order-sizes by uninformed versus informed traders," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 222-235.
    8. Tao Chen & Andreas Karathanasopoulos & Stanley Iat-Meng Ko & Chia Chun Lo, 2020. "Lucky lots and unlucky investors," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 735-751, February.

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    More about this item

    Keywords

    Credit default swap; Price clustering; Size clustering; Notional amount;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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