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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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    References listed on IDEAS

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    Cited by:

    1. Palao, Fernando & Pardo, Ángel, 2014. "What makes carbon traders cluster their orders?," Energy Economics, Elsevier, vol. 43(C), pages 158-165.
    2. repec:eee:intfin:v:49:y:2017:i:c:p:1-14 is not listed on IDEAS
    3. 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.

    More about this item

    Keywords

    Credit default swap; Price clustering; Size clustering; Notional amount;

    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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