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Limited cognition and clustered asset prices: Evidence from betting markets

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  • Brown, Alasdair
  • Yang, Fuyu

Abstract

Asset prices tend to cluster at round numbers. We examine betting exchange data on U.K. horse races to establish whether limited cognition is partially responsible for this clustering. The key tool in this study is the stark increase in cognitive load faced by traders during races compared to prior to races. Using an approach that is part regression discontinuity and part difference-in-differences, we find that traders exhibit a substantially higher propensity to quote round numbers, rather than the nearest non-round numbers, during races. This result is robust to a series of placebo tests.

Suggested Citation

  • Brown, Alasdair & Yang, Fuyu, 2016. "Limited cognition and clustered asset prices: Evidence from betting markets," Journal of Financial Markets, Elsevier, vol. 29(C), pages 27-46.
  • Handle: RePEc:eee:finmar:v:29:y:2016:i:c:p:27-46
    DOI: 10.1016/j.finmar.2015.10.003
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mills, Brian M. & Salaga, Steven, 2018. "A natural experiment for efficient markets: Information quality and influential agents," Journal of Financial Markets, Elsevier, vol. 40(C), pages 23-39.
    2. Urquhart, Andrew, 2017. "Price clustering in Bitcoin," Economics Letters, Elsevier, vol. 159(C), pages 145-148.
    3. Gao, Shenghao & Lu, Ruichang & Ni, Chenkai, 2019. "Institutional investors’ cognitive constraints during initial public offerings," Journal of Banking & Finance, Elsevier, vol. 108(C).

    More about this item

    Keywords

    Limited cognition; Price clustering; Regression discontinuity; Difference-in-differences;

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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