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The Effect of Round Number Bias in U.S. and Chinese Stock Markets

The Effect of Round Number Bias in U.S. and Chinese Stock Markets

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Published by Eric Guo
This paper explores round number bias in a set of U.S. and Chinese large-cap and small- cap stocks over a recent time period. It aims to distinguish manifested bias from inherent bias: due to differences in market conditions, the degree of observed bias does not necessarily reflect inherent bias of investors. The paper finds that U.S. stock prices manifest a lot more clustering around round numbers than Chinese stocks, but after taking into account liquidity and price levels, the degree of bias is about the same. In the U.S., small-caps exhibit more bias than large- caps, but in China, it is the opposite. For Chinese stocks, we find no evidence for excess next day returns around round numbers, but for U.S. stocks, there is negative excess returns, except for U.S. large stocks, which has positive excess return if its previous-day closing price ends with both decimals being round.
This paper explores round number bias in a set of U.S. and Chinese large-cap and small- cap stocks over a recent time period. It aims to distinguish manifested bias from inherent bias: due to differences in market conditions, the degree of observed bias does not necessarily reflect inherent bias of investors. The paper finds that U.S. stock prices manifest a lot more clustering around round numbers than Chinese stocks, but after taking into account liquidity and price levels, the degree of bias is about the same. In the U.S., small-caps exhibit more bias than large- caps, but in China, it is the opposite. For Chinese stocks, we find no evidence for excess next day returns around round numbers, but for U.S. stocks, there is negative excess returns, except for U.S. large stocks, which has positive excess return if its previous-day closing price ends with both decimals being round.

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Categories:Types, Research
Published by: Eric Guo on Jul 21, 2013
Copyright:Attribution Non-commercial

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03/22/2014

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