Ease-of-processing Heuristics and Asset Prices: Evidence from the Exchange-traded Repo Market in China

62 Pages Posted: 1 Mar 2019 Last revised: 27 Apr 2021

See all articles by Xuyun Fang

Xuyun Fang

China Life Asset Management Company Ltd.

Zhiqian Jiang

Florida State University, College of Business, Department of Finance

Baixiao Liu

Florida State University

John J. McConnell

Purdue University

Mingshan Zhou

Southwestern University of Finance and Economics (SWUFE)

Date Written: December 28, 2020

Abstract

Extant studies show that investors’ behavioral biases can cause mispricing in financial assets. In this study, we propose a behavioral explanation for the existence and subsequent disappearance of mispricing in the Chinese exchange-traded repo market. Prior to May 22, 2017, price information displayed on certain days of the week and on days prior to market-closed holidays required investors in exchange-traded repos to infer repos’ actual maturities to place orders at appropriate rates. Repo rates on these days exhibited remarkable seasonalities. On May 22, 2017, the displayed information was modified such that investors no longer had to infer actual maturities. Thereafter, the seasonalities disappeared. We ascribe the seasonalities to investors employing an ease-of-processing heuristic that failed to decipher repos’ actual maturities. Disappearance of the mispricing gives greater assurance to investors of earning competitive repo rates.

Keywords: Cognitive Biases, Asset Prices, Exchange Repo

JEL Classification: G12, G14

Suggested Citation

Fang, Xuyun and Jiang, Zhiqian and Liu, Baixiao and McConnell, John J. and Zhou, Mingshan, Ease-of-processing Heuristics and Asset Prices: Evidence from the Exchange-traded Repo Market in China (December 28, 2020). Available at SSRN: https://ssrn.com/abstract=3331141 or http://dx.doi.org/10.2139/ssrn.3331141

Xuyun Fang

China Life Asset Management Company Ltd.

China Life Center
No. 17 Jinrong St., Xicheng District
Beijing, Beijing 100140
China

Zhiqian Jiang

Florida State University, College of Business, Department of Finance ( email )

Tallahassee, FL
United States

Baixiao Liu (Contact Author)

Florida State University ( email )

Tallahasse, FL 32306
United States

John J. McConnell

Purdue University ( email )

MGMT, KRAN
403 West State St.
West Lafayette, IN 47907-2056
United States
765-494-5910 (Phone)
765-494-7863 (Fax)

Mingshan Zhou

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

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