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Trade-size clustering and price efficiency

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  • Chen, Tao

Abstract

Using a sample of 26 markets, this paper investigates if trade-size clustering affects price efficiency. Our results suggest that more clustering trades are associated with greater resemblance of a random walk, less pricing errors, and shorter price delays. Moreover, we examine three underlying mechanisms to explain how clustering improves efficiency. First, we show that clustering trades are informative, consistent with the idea that stealth traders leverage such tactics to convey private information to prices. Second, we discover that clustering trades are positively related to investor attention (stock liquidity), implying that informed clustering trades happen at the presence of enormous uninformed investors. High attention and liquid markets help reduce the trading friction, thereby prompting quick price adjustments to private information released by the stealth trading.

Suggested Citation

  • Chen, Tao, 2019. "Trade-size clustering and price efficiency," Japan and the World Economy, Elsevier, vol. 49(C), pages 195-203.
    • Handle: RePEc:eee:japwor:v:49:y:2019:i:c:p:195-203
    DOI: 10.1016/j.japwor.2018.12.002
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    More about this item

    Keywords

    Size clustering; Price efficiency; Stealth trading;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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