Management Science 15, 413-431, 2012.
45 Pages Posted: 15 Mar 2010 Last revised: 2 Sep 2017
Date Written: March 30, 2011
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: 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
By Kaushik Basu
By Kaushik Basu