Limited cognition and clustered asset prices: Evidence from betting markets

Brown, Alasdair and Yang, Fuyu (2016) Limited cognition and clustered asset prices: Evidence from betting markets. Journal of Financial Markets, 29. 27–46.

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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.

Item Type: Article
Uncontrolled Keywords: limited cognition,price clustering,regression discontinuity,difference-in-differences
Faculty \ School: Faculty of Social Sciences > School of Economics
UEA Research Groups: Faculty of Social Sciences > Research Groups > Applied Econometrics And Finance
Depositing User: Pure Connector
Date Deposited: 22 Mar 2016 09:12
Last Modified: 21 Oct 2022 02:31
DOI: 10.1016/j.finmar.2015.10.003


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