Trade-size clustering and price efficiency |
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| Affiliation: | 1. School of Economics, Finance and Accounting, Faculty of Business and Law, Coventry University, Priory Street, Coventry CV1 5FB, UK;2. University of Liverpool—Management School, Chatham Building, University of Liverpool, Liverpool L69 7ZH, UK;3. Universidade Católica Portuguesa, Rua Diogo Botelho, 1327, 4169-005 Porto, Portugal;4. Newcastle University Business School, 5 Barrack Road, Newcastle upon Tyne NE1 4SE, UK;1. Departamento Economía Financiera y Contabilidad, Universidad de Alicante, Crta. San Vicente del Raspeig s/n, 03690 San Vicente del Raspeig, Alicante, Spain;2. Departament d’Economia de l’Empresa, Universitat de les Illes Balears, Crta. De Valldemossa, km. 7.5, 07122 Palma de Mallorca, Illes Balears, Spain |
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| 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. |
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| Keywords: | Size clustering Price efficiency Stealth trading |
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