The degree of price resolution: The case of the gold market

• Published in: The journal of futures markets Vol. 5; no. 1; pp. 29 - 43
• Main Authors: Ball, Clifford A., Torous, Walter N., Tschoegl, Adrian E.
• Format: Journal Article
• Language: English
• Published: New York Wiley Subscription Services, Inc., A Wiley Company 01.04.1985; Published by J. Wiley in affiliation with the Center for the Study of Futures Markets, Columbia University; Wiley Periodicals Inc
• Subjects: Bias; Economic models; Economic theory; Equilibrium; Futures; Gold markets; Hypotheses; Market prices; Prices; Rates of return; Statistical analysis; Stock exchanges; Studies
• ISSN: 0270-7314; 1096-9934
• DOI: 10.1002/fut.3990050105

Data from the London gold market are utilized to investigate the nature, frequency, and causes of rounding in transactions prices to the nearest 5, 10, 25, 50 or 100 cents. The basic theoretical model is presented and hypotheses formulated. The data consist of the morning and afternoon fixing prices in London from January 2, 1975, to April 30, 1981. The results indicate that: 1. All returns are measured with error and therefore all empirical work is subject to subtle ''errors in variables problems.'' 2. The degree of rounding may be used as a new proxy in studies for the amount of information in the market. 3. The rules on rounding should be considered in the design of new financial contracts. 4. The market's organization may influence the precision with which prices are formed. The results have implications for the optimal design of securities.