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Invisible walls: Do psychological barriers really exist in stock index levels?

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  • Woodhouse, Sam Alan
  • Singh, Harminder
  • Bhattacharya, Sukanto
  • Kumar, Kuldeep

Abstract

We investigate whether the levels of a stock market index contain any evidence of a behavioural bias depending on the proximity of the index level to ‘psychological barriers’. These are certain index levels (usually in multiples of 100) at which the market tends to stick before breaking out either up or down. Extant behavioural finance literature has attributed this to investors’ subjective perception of ‘something special’ about certain index levels where in fact no rational economic basis exists for such a perception. We carry out an empirical analysis of the NASDAQ Composite index and find that barrier effects are indeed present in that stock index. We employ simulation analysis to validate of our obtained results.

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  • Woodhouse, Sam Alan & Singh, Harminder & Bhattacharya, Sukanto & Kumar, Kuldeep, 2016. "Invisible walls: Do psychological barriers really exist in stock index levels?," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 267-278.
    • Handle: RePEc:eee:ecofin:v:36:y:2016:i:c:p:267-278
    DOI: 10.1016/j.najef.2016.01.006
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    3. Christos Alexakis & Mark Cummins & Michael Dowling & Vasileios Pappas, 2018. "A High-Frequency Analysis of Price Resolution and Pricing Barriers in Equities on the Adoption of a New Currency," Post-Print hal-01994666, HAL.
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    5. Júlio Lobão & Natércia Fortuna & Franklin Silva, 2020. "Do psychological barriers exist in Latin American stock markets?," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 35(2), pages 29-56, October.
    6. Guo, Xu & McAleer, Michael & Wong, Wing-Keung & Zhu, Lixing, 2017. "A Bayesian approach to excess volatility, short-term underreaction and long-term overreaction during financial crises," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 346-358.
    7. Berk, Ales S. & Cummins, Mark & Dowling, Michael & Lucey, Brian M., 2017. "Psychological price barriers in frontier equities," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 49(C), pages 1-14.

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