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

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