A substitution effect between price clustering and size clustering in credit default swaps
Meng, Lei Verousis, Thanos Ap Gwilym, Owain
Meng, Lei
Verousis, Thanos
Ap Gwilym, Owain
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Publication Type
Journal article with impact factor
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Supervisor
Publication Year
2013
Journal
Journal of International Financial Markets, Institutions and Money
Book
Publication Volume
24
Publication Issue
April
Publication Begin page
139
Publication End page
152
Publication NUmber of pages
Collections
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.
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Keywords
Credit Default Swap, Price Clustering, Size Clustering, Notional Amount