TY - JOUR
T1 - A substitution effect between price clustering and size clustering in credit default swaps
AU - Meng, Lei
AU - Verousis, Thanos
AU - ap Gwilym, Owain
PY - 2013/4
Y1 - 2013/4
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=84872033952&partnerID=8YFLogxK
UR - http://dx.doi.org/10.1016/j.intfin.2012.11.011
U2 - 10.1016/j.intfin.2012.11.011
DO - 10.1016/j.intfin.2012.11.011
M3 - Article
SN - 1042-4431
VL - 24
SP - 139
EP - 152
JO - Journal of International Financial Markets, Institutions and Money
JF - Journal of International Financial Markets, Institutions and Money
IS - 1
ER -