Price Clustering and Natural Resistance Points in the Dutch Stock Market: A Natural Experiment

Tinbergen Institute Discussion Paper No. 03-043/1

20 Pages Posted: 21 Jul 2003

See all articles by Joep Sonnemans

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

Date Written: June 2003

Abstract

The main contribution of this study is the finding that round numbers can act as price barriers for individual stocks. In addition, a first step is made to explain this and the related phenomena of round number clustering by testing two competing hypotheses, using data from the Dutch stock market during 1990-2001. After January 1, 1999 stock prices were listed in euros, while guilders were still the currency of daily life until 2002. According to the aspiration level hypothesis investors will have target prices for the stocks they own. This hypothesis predicts that round number effects in guilders will only slowly disappear. The odd price hypothesis originates from cognitive psychology and marketing. Humans have to tendency to compare numbers digit by digit from left to right, and therefore consider an odd price of 19.90 as considerable less than 20.00. This hypothesis predicts an abrupt change in round number effects after January 1, 1999. The results reject the aspiration level hypothesis and are in line with the odd price hypothesis.

Keywords: behavioral finance, natural experiment, price clustering

JEL Classification: G12

Suggested Citation

Sonnemans, Joep, Price Clustering and Natural Resistance Points in the Dutch Stock Market: A Natural Experiment (June 2003). Tinbergen Institute Discussion Paper No. 03-043/1. Available at SSRN: https://ssrn.com/abstract=417321 or http://dx.doi.org/10.2139/ssrn.417321

Joep Sonnemans (Contact Author)

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 4249 (Phone)
+31 20 525 5283 (Fax)

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