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Price clustering and the stability of stock prices

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  • Blau, Benjamin M.
  • Griffith, Todd G.

Abstract

Understanding factors that influence volatility is vital to analysts, investment professionals, and firm managers. In this study, we take a non-traditional approach to identify the determinants of volatility by examining how frictions in the formation of prices affect the stability of stock prices. In particular, we test the hypothesis that clustering on round pricing increments will result in more volatile financial markets. A possible explanation for clustering-induced volatility may be that stocks with a greater degree of clustering will have less informative prices and thus exhibit greater volatility. Our multivariate tests seem to confirm our hypothesis as we observe a strong, positive relation between price clustering and stock price volatility. A variety of additional tests suggest that causation flows from clustering to volatility instead of the other way around.

Suggested Citation

  • Blau, Benjamin M. & Griffith, Todd G., 2016. "Price clustering and the stability of stock prices," Journal of Business Research, Elsevier, vol. 69(10), pages 3933-3942.
    • Handle: RePEc:eee:jbrese:v:69:y:2016:i:10:p:3933-3942
    DOI: 10.1016/j.jbusres.2016.06.008
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    4. Ahmed Baig & Nasim Sabah & Drew Winters, 2019. "Have Stock Prices become more Uniformly Distributed?," Economics Bulletin, AccessEcon, vol. 39(2), pages 1242-1250.
    5. Frantisek Darena & Jonas Petrovsky & Jan Zizka & Jan Prichystal, 2016. "Analyzing the correlation between online texts and stock price movements at micro-level using machine learning," MENDELU Working Papers in Business and Economics 2016-67, Mendel University in Brno, Faculty of Business and Economics.
    6. Dyl, Edward A. & Yuksel, H. Zafer & Zaynutdinova, Gulnara R., 2019. "Price reversals and price continuations following large price movements," Journal of Business Research, Elsevier, vol. 95(C), pages 1-12.
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    8. Ahmed Baig & Benjamin M. Blau & Todd G. Griffith, 2021. "Firm Opacity and the Clustering of Stock Prices: the Case of Financial Intermediaries," Journal of Financial Services Research, Springer;Western Finance Association, vol. 60(2), pages 187-206, December.
    9. Donglian Ma & Hisashi Tanizaki, 2022. "Intraday patterns of price clustering in Bitcoin," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-25, December.
    10. Ozcan, Timucin & Hair, Michael & Gunasti, Kunter, 2024. "How reaching numerical roundness on subgoals affects the completion of superordinate goals," Journal of Business Research, Elsevier, vol. 177(C).
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    12. Vladim'ir Hol'y & Petra Tomanov'a, 2021. "Modeling Price Clustering in High-Frequency Prices," Papers 2102.12112, arXiv.org, revised Mar 2021.
    13. Ahmed S. Baig & Benjamin M. Blau & R. Jared DeLisle, 2022. "Does mutual fund ownership reduce stock price clustering? Evidence from active and index funds," Review of Quantitative Finance and Accounting, Springer, vol. 58(2), pages 615-647, February.
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