Limited cognition and clustered asset prices: Evidence from betting markets

Alasdair Brown and Fuyu Yang

Journal of Financial Markets, 2016, vol. 29, issue C, 27-46

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.

Keywords: Limited cognition; Price clustering; Regression discontinuity; Difference-in-differences (search for similar items in EconPapers)
JEL-codes: G02 G12 G14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:29:y:2016:i:c:p:27-46

DOI: 10.1016/j.finmar.2015.10.003

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