Modeling price clustering in high-frequency prices
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Publication:5039627
Abstract: The price clustering phenomenon manifesting itself as an increased occurrence of specific prices is widely observed and well-documented for various financial instruments and markets. In the literature, however, it is rarely incorporated into price models. We consider that there are several types of agents trading only in specific multiples of the tick size resulting in an increased occurrence of these multiples in prices. For example, stocks on the NYSE and NASDAQ exchanges are traded with precision to one cent but multiples of five cents and ten cents occur much more often in prices. To capture this behavior, we propose a discrete price model based on a mixture of double Poisson distributions with dynamic volatility and dynamic proportions of agent types. The model is estimated by the maximum likelihood method. In an empirical study of DJIA stocks, we find that higher instantaneous volatility leads to weaker price clustering at the ultra-high frequency. This is in sharp contrast with results at low frequencies which show that daily realized volatility has a positive impact on price clustering.
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Cited in
(4)- Modeling discrete stock price changes using a mixture of Poisson distributions
- Time-varying arbitrage and dynamic price discovery
- Modeling microstructure price dynamics with symmetric Hawkes and diffusion model using ultra-high-frequency stock data
- Modeling the coupled return-spread high frequency dynamics of large tick assets
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