Dynamics of Price Clustering in an Emerging Stock Market

This paper examines the existence and drivers of price clustering on the Pakistan Stock Exchange (PSX), a market which was viewed as one of the best performing stock markets in the world during 2014-2017. We document abnormally high levels of stock price clustering, particularly on integer increments. Our multivariate empirical analysis highlights that price clustering on PSX is generally consistent with the negotiation hypothesis of Harris (1991). Unlike developed stock markets, we find that the level of price clustering on PSX is persistent over time and contains a strong cyclical component, suggesting that there has been no significant improvement in price efficiency over the past decade. We also show that stock price clustering on PSX increases during periods of heightened political uncertainty in Pakistan, and this finding is robust to different measures of political uncertainty and alternative econometric specifications