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

Management Science 15, 413-431, 2012.

45 Pages Posted: 15 Mar 2010 Last revised: 2 Sep 2017

Utpal Bhattacharya

Hong Kong University of Science & Technology (HKUST) - 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

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Date Written: March 30, 2011

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.

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

JEL Classification: C15, G12, G20

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). Management Science 15, 413-431, 2012.. Available at SSRN: https://ssrn.com/abstract=1569922

Utpal Bhattacharya

Hong Kong University of Science & Technology (HKUST) - 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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