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

Meng, Lei and Verousis, Thanos and 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, 24. 139 - 152. ISSN 1042-4431

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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.

Item Type: Article
Uncontrolled Keywords: Credit default swap, Price clustering, Size clustering, Notional amount
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 14 Mar 2019 19:55
Last Modified: 14 Mar 2019 20:15
URI: http://repository.essex.ac.uk/id/eprint/24185

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