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Price clustering in the CAC 40 index options market

Author

Listed:
  • Gunther Capelle-Blancard

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Mo Chaudhury

    (Faculty of Management [Montréal] - McGill University = Université McGill [Montréal, Canada])

Abstract

We examine in details the pattern and systematic tendencies of clustering in CAC 40 index option transaction prices during the 1997-1999 period. 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 intraday 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," Post-Print halshs-00265668, HAL.
  • Handle: RePEc:hal:journl:halshs-00265668
    DOI: 10.1080/09603100600949218
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00265668
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    References listed on IDEAS

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    3. 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.
    4. Alain François-Heude & Ouidad Yousfi, 2014. "On the liquidity of CAC 40 index options market," Post-Print hal-02050806, HAL.

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    More about this item

    Keywords

    Clustering; Index Option; CAC 40; Tick; MONEP; Euronext;

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