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Price Clustering and Natural Resistance Points in the Dutch Stock Market

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  • Joep Sonnemans

    (University of Amsterdam)

Abstract

This discussion paper resulted in an article in the 'European Economic Review' (2006). Volume 50, issue 8, pages 1937-1950. The main contribution of this study is the finding that round numbers can act aspricebarriers for individual stocks. In addition, a first step is made to explain this and therelated phenomena of round number clustering by testing two competing hypotheses,using data from the Dutch stock market during 1990-2001. After January 1, 1999stock prices were listed in euros, while guilders were still the currency of daily lifeuntil 2002. According to the aspiration level hypothesis investors will have targetprices for the stocks they own. This hypothesis predicts that round number effects inguilders will only slowly disappear. The odd price hypothesis originates fromcognitive psychology and marketing. Humans have to tendency to compare numbersdigit by digit from left to right, and therefore consider an odd price of 19.90 asconsiderable less than 20.00. This hypothesis predicts an abrupt change in roundnumber effects after January 1, 1999. The results reject the aspiration level hypothesisand are in line with the odd price hypothesis.

Suggested Citation

  • Joep Sonnemans, 2003. "Price Clustering and Natural Resistance Points in the Dutch Stock Market," Tinbergen Institute Discussion Papers 03-043/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20030043
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    File URL: https://papers.tinbergen.nl/03043.pdf
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    References listed on IDEAS

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    Cited by:

    1. Aggarwal, Raj & Lucey, Brian M., 2007. "Psychological barriers in gold prices?," Review of Financial Economics, Elsevier, vol. 16(2), pages 217-230.
    2. Ohta, Wataru, 2006. "An analysis of intraday patterns in price clustering on the Tokyo Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 1023-1039, March.
    3. Whynes, David K. & Frew, Emma J. & Philips, Zoe N. & Covey, Judith & Smith, Richard D., 2007. "On the numerical forms of contingent valuation responses," Journal of Economic Psychology, Elsevier, vol. 28(4), pages 462-476, August.

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    More about this item

    Keywords

    behavioral finance; natural experiment; price clustering.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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