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Price clustering in the CAC 40 index options market

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  • Gunther Capelle-Blancard
  • Mo Chaudhury

Abstract

We examine in details the pattern and systematic tendencies of clustering in CAC 40 index option transaction prices during the period 1997 to 1999. Similar to extant studies in many financial markets, there is evidence of strong clustering at full index points and option prices are 90% more likely to end with the digit 0 (multiples of 10) than with the digit 5. While the 1999 contract downsizing led to some reduction in clustering at full index point, the basic pattern of clustering remains intact. The pattern of clustering rejects the attraction theory, but is consistent with the notion of cost recovery by market makers. We find important drivers for CAC 40 index option price clustering, namely, the level of option premium, option volume and underlying asset volatility. Higher premium level, higher asset volatility and lower volume are seen to increase option price clustering. We also observe a U-shaped pattern of clustering on an intra-day and intra-year basis. The option premium and volatility effects are consistent with a price level effect. The volatility effect also lends support to the notion of cost recovery by market makers. The volume effect likely represents a liquidity effect and is consistent with the Price Precision Hypothesis.

Suggested Citation

  • Gunther Capelle-Blancard & Mo Chaudhury, 2007. "Price clustering in the CAC 40 index options market," Applied Financial Economics, Taylor & Francis Journals, vol. 17(15), pages 1201-1210.
    • Handle: RePEc:taf:apfiec:v:17:y:2007:i:15:p:1201-1210
    DOI: 10.1080/09603100600949218
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    2. Narayan, Paresh Kumar & Smyth, Russell, 2013. "Has political instability contributed to price clustering on Fiji's stock market?," Journal of Asian Economics, Elsevier, vol. 28(C), pages 125-130.
    3. Li, Xin & Li, Shenghong & Xu, Chong, 2020. "Price clustering in Bitcoin market—An extension," Finance Research Letters, Elsevier, vol. 32(C).
    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. 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.
    6. Alain François-Heude & Ouidad Yousfi, 2014. "On the liquidity of CAC 40 index options market," Post-Print hal-02050806, HAL.
    7. Narayan, Paresh Kumar, 2022. "Evidence of oil market price clustering during the COVID-19 pandemic," International Review of Financial Analysis, Elsevier, vol. 80(C).

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