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http://ssrn.com/abstract=1569922
 
 

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Penny Wise, Dollar Foolish: Buy-Sell Imbalances On and Around Round Numbers


Utpal Bhattacharya


Hong Kong University of Science & Technology - HKUST School of Business and Management

Craig W. Holden


Indiana University - Kelley School of Business - Department of Finance

Stacey E. Jacobsen


Southern Methodist University (SMU) - Edwin L. Cox School of Business - Department of Finance

March 30, 2011

AFA 2011 Denver Meetings Paper
Management Science, (special issue on Behavioral Economics and Finance), Forthcoming

Abstract:     
This paper provides evidence that stock traders focus on round numbers as cognitive reference points for value. Using a random sample of more than 100 million stock transactions, we find excess buying (selling) by liquidity demanders at all price points one penny below (above) round numbers. Further, the size of the buy-sell imbalance is monotonic in the roundness of the adjacent round number (i.e., largest adjacent to integers, second-largest adjacent to half-dollars, etc.). Conditioning on the price path, we find much stronger excess buying (selling) by liquidity demanders when the ask falls (bid rises) to reach the integer than when it crosses the integer. We discuss and test three explanations for these results. Finally, 24-hour returns also vary by price point and buy-sell imbalances are a major determinant of that variation across price points. Buying (selling) by liquidity demanders below (above) round numbers yield losses approaching $1 billion per year.

Number of Pages in PDF File: 45

Keywords: Left-digit effect, nine-ending prices, round numbers, trading strategies, clustering

JEL Classification: C15, G12, G20

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Date posted: March 15, 2010 ; Last revised: May 12, 2014

Suggested Citation

Bhattacharya , Utpal and Holden, Craig W. and Jacobsen, Stacey E., Penny Wise, Dollar Foolish: Buy-Sell Imbalances On and Around Round Numbers (March 30, 2011). AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1569922

Contact Information

Utpal Bhattacharya
Hong Kong University of Science & Technology - HKUST School of Business and Management ( email )
Clear Water Bay
Kowloon
Hong Kong
Craig W. Holden (Contact Author)
Indiana University - Kelley School of Business - Department of Finance ( email )
Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)
HOME PAGE: http://www.kelley.iu.edu/cholden

Stacey E. Jacobsen
Southern Methodist University (SMU) - Edwin L. Cox School of Business - Department of Finance ( email )
P.O. Box 750333
Dallas, TX 75275-0333
United States
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