A High-Frequency Analysis of Price Resolution and Pricing Barriers in Equities on the Adoption of a New Currency

Abstract

We use ultra high frequency (trade by trade) data to demonstrate that equity price clustering and pricing predictability around psychologically important prices in Greece switches away from drachma-focused with the introduction of the euro, but does not immediately switch to euro-clustering. The change in trader price focus around the euro introduction addresses an open debate in the clustering literature on whether the presence of clustering is a bias related to current prices or anchoring to past prices. Our findings of a decline in drachma clustering, but lack of switch to euro effects supports the case for clustering being a trading feature that is slow to transfer to new pricing regimes. A key advantage of the ultra high frequency dataset is we are also able to demonstrate the presence of psychological pricing barriers related to each currency that are not detectable in daily data.

Keywords: clustering, psychological barriers, euro introduction, transaction data

JEL Classification: G02, G14