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Limited Cognition and Clustered Asset Prices: Evidence from Betting Markets

  • Alasdair Brown

    (University of East Anglia)

  • Fuyu Yang

    (University of East Anglia)

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-difference, we find that traders exhibit a substantially higher propensity to quote round numbers during races. This result is robust to a series of placebo tests, and also to the use of bounds to deal with missing data.

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File URL: http://www.uea.ac.uk/menu/depts/eco/research/RePEc/uea/papers_pdf/UEA-AFE-054d.pdf
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Paper provided by School of Economics, University of East Anglia, Norwich, UK. in its series University of East Anglia Applied and Financial Economics Working Paper Series with number 054.

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Date of creation: Dec 2013
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Handle: RePEc:uea:aepppr:2012_54
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  1. Justin R. Sydnor & Devin G. Pope & Nicola Lacetera, 2011. "Heuristic Thinking and Limited Attention in the Car Market," 2011 Meeting Papers 105, Society for Economic Dynamics.
  2. ap Gwilym, Owain & Clare, Andrew & Thomas, Stephen, 1998. "Price clustering and bid-ask spreads in international bond futures," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(3-4), pages 377-391, December.
  3. Sonnemans, Joep, 2006. "Price clustering and natural resistance points in the Dutch stock market: A natural experiment," European Economic Review, Elsevier, vol. 50(8), pages 1937-1950, November.
  4. Harris, Lawrence, 1991. "Stock Price Clustering and Discreteness," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 389-415.
  5. Hirshleifer, David & Lim, Sonya Seongyeon & Teoh, Siew Hong, 2006. "Driven to distraction: Extraneous events and underreaction to earnings news," MPRA Paper 3110, University Library of Munich, Germany, revised 16 Apr 2007.
  6. Ahn, Hee-Joon & Cai, Jun & Cheung, Yan Leung, 2005. "Price clustering on the limit-order book: Evidence from the Stock Exchange of Hong Kong," Journal of Financial Markets, Elsevier, vol. 8(4), pages 421-451, November.
  7. Utpal Bhattacharya & Craig W. Holden & Stacey Jacobsen, 2012. "Penny Wise, Dollar Foolish: Buy-Sell Imbalances On and Around Round Numbers," Management Science, INFORMS, vol. 58(2), pages 413-431, February.
  8. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, 04.
  9. Victor Niederhoffer, 1965. "A New Look at Clustering of Stock Prices," The Journal of Business, University of Chicago Press, vol. 39, pages 309.
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