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The Clustering of Bid/Ask Prices and the Spread in the Foreign Exchange Market

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  • Riccardo Curcio
  • Charles Goodhart

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    Abstract

    Following Lawrence Harris (1989b) study of price clustering in stock prices, we examine the smae phenomenon in the forex market. The pattern of clustering in the final digit of bid/ask prices depends on the desired degree of price resolution. The selection of spreads also involves clustering, but this is driven by a different behavioural pattern, consistent with the pure attraction hypothesis. The combination of the two patterns can explain the differing frequencies of final digits in the bids as compared with the asks.

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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/DP110.pdf
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    Bibliographic Info

    Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp110.

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    Date of creation: Jan 1991
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    Handle: RePEc:fmg:fmgdps:dp110

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    Web page: http://www.lse.ac.uk/fmg/

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    Cited by:
    1. Carol L. Osler, 2001. "Currency orders and exchange-rate dynamics: explaining the success of technical analysis," Staff Reports 125, Federal Reserve Bank of New York.
    2. Carol L. Osler, 2003. "Currency Orders and Exchange Rate Dynamics: An Explanation for the Predictive Success of Technical Analysis," Journal of Finance, American Finance Association, vol. 58(5), pages 1791-1820, October.
    3. Hartmann, Philipp, 1999. "Trading volumes and transaction costs in the foreign exchange market: Evidence from daily dollar-yen spot data," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 801-824, May.
    4. Paresh Kumar Narayan & Russell Smyth, 2011. "Has political instability contributed to price clustering on Fiji's stock market?," Financial Econometics Series 2011_03, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
    5. ap Gwilym, Owain & Verousis, Thanos, 2010. "Price clustering and underpricing in the IPO aftermarket," International Review of Financial Analysis, Elsevier, vol. 19(2), pages 89-97, March.
    6. Verousis, Thanos & ap Gwilym, Owain, 2013. "Trade size clustering and the cost of trading at the London Stock Exchange," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 91-102.
    7. Mehdi Lallouache & Fr\'ed\'eric Abergel, 2013. "Tick Size Reduction and Price Clustering in a FX Order Book," Papers 1307.5440, arXiv.org, revised May 2014.
    8. Bharati, Rakesh & Crain, Susan J. & Kaminski, Vincent, 2012. "Clustering in crude oil prices and the target pricing zone hypothesis," Energy Economics, Elsevier, vol. 34(4), pages 1115-1123.
    9. 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.
    10. Engelberg, Joseph & Williams, Jared, 2009. "eBay's proxy bidding: A license to shill," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 509-526, October.
    11. Narayan, Paresh Kumar & Narayan, Seema & Popp, Stephan & D'Rosario, Michael, 2011. "Share price clustering in Mexico," International Review of Financial Analysis, Elsevier, vol. 20(2), pages 113-119, April.
    12. Hao-Chen Liu, 2011. "Timing of price clustering and trader behavior in the foreign exchange market: evidence from Taiwan," Journal of Economics and Finance, Springer, vol. 35(2), pages 198-210, April.
    13. Aitken, Michael & Brown, Philip & Buckland, Christine & Izan, H. Y. & Walter, Terry, 1996. "Price clustering on the Australian Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 4(2-3), pages 297-314, July.
    14. Brown, Philip & Chua, Angeline & Mitchell, Jason, 2002. "The influence of cultural factors on price clustering: Evidence from Asia-Pacific stock markets," Pacific-Basin Finance Journal, Elsevier, vol. 10(3), pages 307-332, June.
    15. Bollerslev, Tim & Domowitz, Ian & Wang, Jianxin, 1997. "Order flow and the bid-ask spread: An empirical probability model of screen-based trading," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1471-1491, June.
    16. Mitchell, Jason & Izan, H.Y., 2006. "Clustering and psychological barriers in exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(4), pages 318-344, October.

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