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Trade-size clustering and price efficiency

Tao Chen ()

Japan and the World Economy, 2019, vol. 49, issue C, 195-203

Abstract: Using a sample of 26 markets, this paper investigates if trade-size clustering affects price efficiency. Our results suggest that more clustering trades are associated with greater resemblance of a random walk, less pricing errors, and shorter price delays. Moreover, we examine three underlying mechanisms to explain how clustering improves efficiency. First, we show that clustering trades are informative, consistent with the idea that stealth traders leverage such tactics to convey private information to prices. Second, we discover that clustering trades are positively related to investor attention (stock liquidity), implying that informed clustering trades happen at the presence of enormous uninformed investors. High attention and liquid markets help reduce the trading friction, thereby prompting quick price adjustments to private information released by the stealth trading.

Keywords: Size clustering; Price efficiency; Stealth trading (search for similar items in EconPapers)
JEL-codes: G14 G15 G41 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.japwor.2018.12.002

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