Price clustering in the CAC 40 index options market

Gunther Capelle-Blancard and Mo Chaudhury
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Mo Chaudhury: Faculty of Management [Montréal] - McGill University = Université McGill [Montréal, Canada]

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Abstract: We examine in details the pattern and systematic tendencies of clustering in CAC 40 index option transaction prices during the 1997-1999 period. Similar to extant studies in many financial markets, there is evidence of strong clustering at full index points and option prices are 90% more likely to end with the digit 0 (multiples of 10) than with the digit 5. While the 1999 contract downsizing led to some reduction in clustering at full index point, the basic pattern of clustering remains intact. The pattern of clustering rejects the attraction theory, but is consistent with the notion of cost recovery by market makers. We find important drivers for CAC 40 index option price clustering, namely, the level of option premium, option volume and underlying asset volatility. Higher premium level, higher asset volatility and lower volume are seen to increase option price clustering. We also observe a U-shaped pattern of clustering on an intraday and intra-year basis. The option premium and volatility effects are consistent with a price level effect. The volatility effect also lends support to the notion of cost recovery by market makers. The volume effect likely represents a liquidity effect and is consistent with the Price Precision Hypothesis.

Keywords: Clustering; Index Option; CAC 40; Tick; MONEP; Euronext (search for similar items in EconPapers)
Date: 2007-04
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Citations: View citations in EconPapers (7)

Published in Applied Financial Economics, 2007, 17 (15), pp.1201-1210. ⟨10.1080/09603100600949218⟩

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Working Paper: Price clustering in the CAC 40 index options market (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00265668

DOI: 10.1080/09603100600949218

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