Price clustering is manifest in some prices being observed more frequently than others, when underlying value is uniformly distributed over the range of admissible prices. It is frequently observed in financial markets. We investigate clustering in individual trades effected on the Australian Stock Exchange's wholly computerised, order-driven trading system. We find that price clustering is pervasive, tending to follow an overall pattern somewhat similar to that found in US securities markets. Clustering results from imprecise beliefs ('haziness') about firm value together with the existence of conventional, salient focal points within regions of haziness. Thus we find that clustering increases with the price of the stock (reflecting imprecision in beliefs about firm value) and with surrogates for greater haziness such as higher market-wide volatility, own stock volatility, trade size, and the size of the bid-ask spread. Clustering is lower when price discovery is likely to be more efficient; that is, it decreases with trading frequency, and it is lower for stocks with options traded on them and for stocks that can be sold short.
|Number of pages||18|
|Journal||Pacific-Basin Finance Journal|
|Publication status||Published - Jul 1996|
- Australian stock exchange
- Price clustering
- Stock prices