A substitution effect between price clustering and size clustering in credit default swaps

Lei Meng, Thanos Verousis, Owain ap Gwilym

Research output: Contribution to journalArticle

8 Citations (Scopus)
136 Downloads (Pure)

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.
Original languageEnglish
Pages (from-to)139-152
Number of pages14
JournalJournal of International Financial Markets, Institutions and Money
Volume24
Issue number1
DOIs
Publication statusPublished - Apr 2013

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