The Effect of Round Number Bias in U.S.

and Chinese Stock Markets

Tiansheng Guo ’14 Princeton University

Advisor: Professor Wei Xiong Assistant Instructor: Michael Sockin

April 24, 2013

This paper represents my own work in accordance with University regulations.

Abstract

This paper explores round number bias in a set of U.S. and Chinese large-cap and smallcap 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 largecaps, 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.

I. Introduction

The exploitation of “round number bias” is ubiquitous in retail and grocery markets (grocery retailing). Prices are most often set just slightly less than a round number ($9.99, $9.95), exploiting the irrational way in which our minds convert numerical symbols to analog magnitudes for decision-making: prices just below a round number will be perceived to be a lot smaller than the round number price due to the change in the leftmost digit (Thomas and Morwitz, 2005). Because this slight drop in price is perceived by the mind to be proportionally more, price is perceived to be lower than the value of a product, causing a discontinuity around round number prices. These round number biases extend beyond real assets into financial assets. Aggarwal and Lucey (2005) presented evidence of barriers in gold prices due to round number bias, with
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important effects on the conditional mean and variance. Johnson, Johnson and Shanthikumar (2008) found significant differences in returns following previous-day closing prices around round numbers in U.S. stock markets. In China, retail investors dominate the securities market, and we expect round number bias to be more pronounced. These studies suggest investors’ biases for round numbers are a source of irrationality and affect the price levels, which may result in excess returns. In this paper, we explore round number bias by analyzing price clustering around round numbers and excess returns conditional on previous-day round numbers, for U.S. and China during the time period 2001-2011. We compare the degree of bias between U.S. and Chinese large-cap and small-cap stocks, which few previous studies have done, especially after the decimalization of U.S. stock market in 2001. In order to make the comparison valid, we use a methodological process for choosing stocks so that the U.S. and Chinese stock data are comparable. We also control for varying amounts of liquidity and price levels in the different data sets that may affect observed bias. We expect that there will be little or insignificant effect from round number bias in the U.S. stock market, due to the greater presence of more rational hedge funds and institutions, but expect that in the Chinese stock market, where individual investors dominate, round number bias should be greater. The results of this paper is interesting both practically and theoretically: a significant finding for an uneven distribution of price levels (e.g. prices end in round numbers more often) would challenge the price equals value sense of market efficiency because there is no reason that value should end in certain digits more often than others; even if the effect of

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They also found that students who take the SAT are much more likely to retake it if they score just below a round number. we should see certain price levels appear in trades more frequently than numbers that have no preferences. and is present in prices and other metrics. and perhaps even excess returns. hoping that the change in the left-most digit will be seen as a much greater improvement than the marginal effort that is exerted. the proportion of batters who hit . Pope and Simonsohn (2010) found that in baseball. and there were also more instance of . the findings can still help the precisely time high-frequency trades. 300 (1.4%) was four times greater than those who hit . Johnson. if the same preferences hold for certain numbers. even when there were no round number bias on the side of the admissions officers.Literature Review Round number bias is an innate human cognitive bias.38%). They also found that 4 of 38 . Individuals were willing to exert extra effort to perform just above rather than below such numbers. there were more selling. more buying.299 (0.round number bias on returns is too small to present arbitrage opportunities. and if just above. In financial markets.301 than of . The innate cognitive bias for certain numbers is also reflected in how individuals view prices. Johnson and Shanthikumar (2008) found that investors trade differently when closing prices are just below a round number versus just above.298. Thomas and Morwitz (2005) found that nine-ending prices affect perception when the leftmost digit changes. II. when prices were just below a round number. and that these effects are not limited to certain types of prices or products.

there is more media coverage that would drive up the sentiment. high. converted from guilders (2. it presents an interesting natural experiment: after January 1. For Shanghai and Shenzhen stock exchanges. security analysts tend to round forecasts. Donaldson and Kim (1993) found support and resistance levels in round numbers in DJIA. even for indices that are arbitrarily scaled (and does not say much about fundamentals). First. price levels cluster around round numbers. to analyze the final digit of the prices. low. 1999. Immediately after this conversion and numerical changes in prices. They also found much weaker preference for 8 for the corresponding B-shares on both exchanges. but did not find these biases in less 5 of 38 . stock prices started to be listed in euros. when well-publicized stocks surpass significant price price levels. Furthermore. so traders who read the forecasts will have expectations that are clustered around round numbers (Herrmann. and closing prices. the prices of A-shares traded were more than twice as likely to end in 8 as in 4 for the period 1994-2002. There are several explanations for round number bias in price levels of stocks. especially when there is much uncertainty. but the effect has dissipated a little over time. On the SSE. Second. Thomas 2005). and found “extremely clear” clustering.returns following closing prices just above a round number are significantly higher than returns following prices just below. Brown and Mitchell (2004) used daily opening. clustering in round guilder prices disappeared while price clustering in round euro prices formed.20371 guilders = 1 euro) while guilders remained the currency of daily life. and round numbers act as price barriers. Sonnemans (2003) examined the Dutch stock market during 1990-2001 and found that for individual Dutch stocks.

we analyze how the effect of the bias differs in two drastically different countries. financial systems.S. and China have very different set of investors. we expect to find less evidence for round number bias in China. so stop and limit orders may be clustered around round numbers. culture. Because of these encouraging findings from past studies. so that the bias manifested by investors does not equal their inherent bias.S. and wealth distribution.S. The findings of this paper can illustrate how 6 of 38 . and 18 Chinese small-cap stocks. and China.S. which few previous studies have done. large-cap. We will perform the same analysis (price clustering. U.popular indices. next day returns) on these numbers. futher study can be conducted on isolating which characteristic differences of U. which can all influence the degree of round number bias present in their respective stock markets. traders may set target prices (aspiration level) for their stock. Another innovation of this paper is that it takes into account the possibility of liquidity and price level as possible confounding variables to our findings in round number bias. This paper will run tests for price clustering and abnormal returns for daily closing prices of 18 U. and China makes their markets more susceptible to this apparent irrationality.S. It is interesting to compare these two countries. U. using most recent data.S. and then adjust for liquidity and price levels. stock data.S. investors are more sophisticated. and China. with the possibility of even excess returns around round numbers. 18 Chinese large-cap. assuming U. If round number bias does manifest differently in U.S. laws. and expect to find even smaller effects of round number bias in U. 18 U. Third. small-cap. although round number bias is caused by an innate cognitive flaw that is present in societies using arabic numerals. Because our data sets are more recent than those in previous studies. usually at round numbers.

which are all found on Wharton Research Data Services. The following Figure 1 lists the stocks used in the four data sets.S. stocks traded on NYSE and 36 Chinese stocks traded on the SSE (A shares only). we will study daily closing prices and daily returns with cash dividend reinvested. are chosen randomly. Among the 36 U. for the decade 6/1/2001 to 5/31/2011. stocks. large cap stocks are drawn from the 50 largest U.round number bias has persisted through the most recent decade.S. and China. U.S. and 36 Chinese stocks. half are large-cap stocks and half are smallcap stocks. Data To analyze “price clustering around round numbers” and “next day returns conditional on round number prices”. Chinese small-cap. of a set of 36 U. The 18 U.S. The starting date of 6/1/2001 is after the complete decimalization of the U. large-cap.S. stock market. III. The data sets exclude financials. It can also show how large-caps and small-caps manifest bias differently within U.S. and encompass a variety of industries.S.S.S. The 18 U. Chinese large-cap. and the 18 Chinese small cap stocks are drawn from stocks in the SSE SmallCap Index (China Securities Index). small-cap: 7 of 38 . and the 18 Chinese large cap stocks are drawn from the 50 largest on the SSE. in which there was a boom in trading volume and investor sophistication. and U. small cap stocks are drawn from the market cap range 500M-800M.

). 53. data for earlier time periods were not available because those companies were not publicly traded as early as 2001. All closing prices that are 1. which states that leading digits in naturally occurring data is not uniform. 40. 40.647 for US Small Cap stocks. Chinese small. Missing or extra data has little impact as long as all observations belong in the correct category (US Large.004 for Chinese Small Cap. to avoid complications with Benford’s Law. The reason for using price levels as opposed to other measures such as P/E. P/B is that 8 of 38 . but there were some missing and extra data that have negligible impact on our analysis. yielding extra data.Figure 1: List of all stocks used The number of firm-day observations over the 2001-2011 decade are as follows: 32. etc. or as with small stocks and Chinese stocks.918 for US Large Cap.00 or below were deleted to prevent cases where the leading digits are also the ending digits. A complete data set ideally contains 10*252*18 = 45360 firm-day observations over the 10 years for 18 stocks.167 for Chinese Large Cap. Stocks go through mergers and acquisitions and become listed under another ticker.

although P/E or P/B may have just as much evidence for numerical pricing biases. are that there is plentiful data from the two countries. analyzing the final digit of the prices to observe clustering. and regulations. and the financial markets of these two countries are so different in terms of listed companies. or China” and “large cap or small cap”. and can linger in the minds of investors after a day of trading. Brown and Mitchell (2004) used daily opening. also with significant results. Johnson. Johnson and Shanthikumar (2008) used previous day closing prices that are just above or below a round number to examine returns. we expect different sets of investors to be trading in large cap and small cap stocks. capturing much of the behavioral biases.S. investors. In any case. unlike the HKSE. For Chinese stocks. that many extensions and further studies can be done based on this finding. The benefit of this decade is that we see a rise out of the dot-com bubble and another rise and fall in prices from the Great Recession. We use daily closing prices because they attract more investor attention than a random price level during the day. unadjusted closing prices and found significant results in price clustering. and different number of analysts covering the stocks. which would allow a larger 9 of 38 . low. since they are especially susceptible to security analyst’s rounding of forecasts or investors’ targets. and closing prices. many studies have looked at just price levels and found robust results.prices levels are the final numbers seen when executing trades. For Shanghai. high. so we expect the magnitude of round number biases to differ across market caps and countries. Aggarwal and Lucey (2005) and Sonnemans (2003) both used daily. The reasons for drawing data from “U. We choose the period June 2001 to June 2011 because the NYSE reported prices in fractions (1/16) before 2001. we draw from A shares listed on the SSE because it has a large market capitalization and is not open to foreign investors.

as opposed to probit. Price clustering is defined as prices levels at which proportionally more trades occur. The price clustering analysis will be graphically presented in a frequency chart. institutional investors become more sophisticated. This decade is interesting to analyze because the advent of online trading allows many more unsophisticated traders to participate in the stock market. and Chinese stock data for price clustering around round numbers.Z0) or two round decimals ($XY. If there were no price clustering. then the decimals of stock prices should be distributed uniformly from .99. categorized by country (U. The first part will analyze U.S. The second part will analyze next day returns conditioning on round number closing price. but at the same time. then a previous day closing price that ended in a round number would have no significant explanatory power in the next day returns. If there were no abnormal returns. Round number will be defined as prices ending in one round decimal ($XY.range of price levels and potential for certain prices to cluster.00). Methodology The paper will use a two-part analysis. It uses ‘ifone’ as a binary variable for the last decimal 10 of 38 .00 to . tallying the occurrences of round number closing price. and abnormal next day returns as a significant regression coefficient on a variable measuring “round number”. followed by a linear regression (with binary dependent variable).S. small cap). for easier interpretation of the coefficients. The next day returns analysis will be conducted with linear regressions. vs. IV. China) and size (large cap vs.

Due to inaccessibility of order-book data. we analyze manifested bias through simple price clustering analysis. V. and ‘big’ for large cap stocks.. Then. A second-round analysis takes this into account and includes measures of liquidity and price levels to take out their effects from price clustering and next day returns. price levels) across China and U. to observe inherent bias. ‘China’ for Chinese firms. we control for liquidity and price levels as amplifiers of bias. An example regression is shown below: reti = β 0 + β1ifonei + β 2iftwoi + β 3ifonei × China + β 4 iftwoi × China + β 5ifonei × big + β 6iftwoi × big This paper makes a distinction between manifested and inherent bias.Simple Price Clustering 11 of 38 . but can be used to compare within those countries..S. ‘iftwo’ for both decimals.being a round number. Price Clustering First. The two binary variables ‘ifone’ and ‘iftwo’ will be interacted with different combinations of the other variables. Due do differences in market conditions (liquidity. the observed round number bias may be an amplified measure of investor’s inherent bias. Results. we use ‘volume’ as a crude measure of liquidity that may not be valid when comparing China and U.S.

compared to a line of “average” representing the expected number of observations assuming a uniform distribution of price levels.The following graphs tally daily closing prices by last ending-decimal only. Figure 2 12 of 38 .

Figure 3 Figure 4 13 of 38 .

data sets.Y5. much more so than Chinese data sets. or WX.Figure 5 In all four data sets.S. we zoom in the same data sets by tallying closing prices by the last two endingdecimals. Next.Y0 and WX. and slightly stronger in small cap stocks than in large cap stocks. there is a robust and persistent clustering around prices of the form WX. 14 of 38 . For U.S. clustering is especially pronounced in prices that end in ‘5’s. compared to a line representing expected frequency given a uniform distribution. data sets than in Chinese data sets. Clustering is much stronger in U.Y5.

Figure 6 Figure 7 15 of 38 .

Figure 8 Figure 9 16 of 38 .

70’.X0’ and not ‘. 12/16.S. Another explanation for the clustering around “quarter” values is the lingering effects of the time period prior to decimalization of stock prices. and not China can be explained by the pervasive use of the “Quarter” coin as a currency.99 and . 17 of 38 . . ‘. data is manifested much more than in Chinese data.S. Frequent use of the “Quarter” among the U. and China.S.98’ and ‘. only. population strengthens their familiarity and affinity for the .Y0’ are accounted for by ‘WX.25’ and ‘.20.10.50’. In the U. ‘. Additionally.S. especially for small caps.99’ and ‘.98).S.S. In Chinese small cap data in particular.S.S.X5’.X5’ occurred more than uniform. round number bias is so strong that prices ending in ‘. had a preference for ‘. and especially ‘. so that much of the occurrences of ‘WX.50’ all occurred more than the uniform distribution in both U.00’ and ‘WX. and are the only two price endings that are greater than their round-number counterparts.20’ and ‘. which is a foreign concept to the Chinese.88’ had more occurrences than any other non-round number (except . in both U. investors strongly prefered both. large and small caps. and additionally in U. This preference for “quarter” prices in the U.).25 values. It is also interesting to see that Chinese data. . ‘.X0’ (. Most of the prices ending in a ‘0’ as the last decimal have another ‘0’ or a ‘5’ as the decimal before it. Note that Chinese investors prefered prices ending in ‘.75’ had the greatest occurrences of all prices ending in ‘. bias in small cap stocks is much more than in large cap stocks.30 etc. so U. data. all prices ending in ‘.The findings of “two decimals” analysis support that of “one decimal”: round number bias in U.. while U.S. which occurred right before our sample period. and for Chinese data.00’ occured twice as often as in a uniform distribution. Prices ending in ‘. investors are used to trading in 2/8.88’ that is not seen at all in U.X5’.S.

in “Chinese Big stocks”.01576 of seeing both as round. however. For example. with ‘88’ being even luckier. Figure 11 18 of 38 .This can be attributed to ‘8’ as a lucky number in the Chinese culture. Figure 10 The table below summarizes regression results. The following linear regressions quantifies probabilities of seeing at least the last decimal as a round number (ifone). there is a 0. and 0. and seeing both decimals as round numbers (iftwo).11195 probability of seeing the last decimal as round. its unlucky counterpart ‘4’ did not show any difference from the average (investors did not avoid trading around that number).

U. while higher price levels should allow for more bias. due to low liquidity. More liquidity should mean less round number bias. giving the same investor more chances of choosing a round price in the neighborhood of prices. data sets may be explained by 1) high bid-ask spread. to analyze “inherent bias” of investors.S. so that a biased trader is “penalized” less for his round number bias. investors incur less cost for being biased. Therefore.S. and the significantly more clustering seen in U.Discussion. large cap. The result of this initial survey is not surprising. data does not prove that U. Chinese small cap. we show that liquidity and price level effects can confound our price clustering analysis. greater clustering in U. a one-cent difference in price is a smaller fraction of total value traded. investors are inherently more biased than Chinese investors. and we can rank the strength of bias (from weak to strong): Chinese large cap. pure frequency of seeing a round number does not accurately measure degree of bias.S.S. Also.S. This means that “manifested bias” does not translate to “inherent bias” of investors. If data sets with lower liquidity and higher price levels happen to have 19 of 38 . and 2) high nominal price per share. The probability of seeing a trasaction on a round number is tightly tied to the bid-ask spread: if the bid-ask spread is wide. If the price level of a share is higher.Simple Price Clustering The manifested bias in the data is statistically significant. Results. small cap. it has a greater chance of including a round number. meaning U.S. The next section shows price clustering analysis adjusting for liquidity and price levels.Price Clustering Adjusted for Liquidity and Price Levels First. and U.

higher level of round number bias. and not inherent round number bias of investors. For U. data sets. then bias can actually be driven by liquidity and price level effects. we use volume as a proxy. we need to adjust for liquidity and price level. Due to inaccessibility of bid-ask spread on Chinese data. we have bid-ask spread data. measured in millions of shares: Figure 12 We see that Chinese stocks and large-cap stocks trade a lot more. The table below shows the probabilities of observing round number closing prices for U.S. so liquidity can confound price clustering (resulting in less clustering in Chinese data). The following table summarizes the average volume per firm-day.S. If there are confounding effects. data over the years: Figure 13 20 of 38 .

S. To adjust for liquidity and price level effects. Therefore. weighted 21 of 38 . and 2) use frequency weighted by price level. which is also consistent with the direction of round number bias.S. The weighted frequency variables ‘weightedifone’ and ‘weightediftwo’ are calculated using the following: weightedifone = 100 * ifone Pricelevel weightediftwo = 100 * iftwo Pricelevel The weighted variables reflect degree of bias more accurately: for smaller price levels. This decrease is associated with the decrease in “bid-ask fraction”. stocks and large-cap stocks trade at higher price levels. calculated by closing bid-ask spread divided by closing price. investors are “penalized” less as a percentage of their investment for a one-cent error. we 1) add ‘volume’ into the regression. suggesting that liquidity and a narrower bid-ask window possibly reduced investor’s manifested bias.Probabilities of seeing round number prices fell consistently and significantly over the decade. price levels could also have amplified or dampened investor’s inherent bias. The following table shows that price levels are also different across the four data sets: Figure 14 We see that U. to converge with the uniform distribution. U.

and presents a measure of inherent bias in each of the four data sets: Figure 16 22 of 38 . The result of linear regressions after controlling for differences in liquidity and price levels are presented below: Figure 15 The following table summarizes regression (2) from above.variables are greater. representing the higher percentage costs that investors incur for being biased by one-cent.

it is the reverse. For example.26531) on average increases the chance of seeing the last one (or two) decimals as round. 23 of 38 .40144) = . (1..S.S. a U.S.26531%). small stock trading around $23 has an increased 10. Chinese large-cap. though it is hard to interpret. and U. as a one-cent fraction of their closing price. Chinese small-cap. the difference would be 1. with higher meaning more bias. This is a substantial impact given that average volume of the four data sets vary widely (Figure 12). After controlling for liquidity and price levels.86229% (or 0.86229. weightediftwo = 0. since it reduces the amount of bias through a tighter bid-ask spread. ∆ ifone = . small-cap stocks exhibit more bias than large-caps.00125%.60% chance of seeing a first decimal round than if it were a U.S.S.S. An increase in a million shares per firm-day on average reduces its ‘weightedifone’ and ‘weightediftwo’ by 0. (holding constant volume). This apparent contradiction is explored in the later “Discussion” section. We also notice that volume has a negative coefficient as expected.10600 Pricelevel 23 But if it were trading around $4.01464% and 0. being a U. by 1. The interpretation is as follows: given the same volume.8434% for a small stock over a big stock.86229 − 1. but in China. small-cap. The result suggest that in the U.The effects can be seen as a rescaled measure of degree of bias. small-cap stock (weightedifone = 1. big stock: weightedifone = 100 * ifone 100 * ∆ ifone . Figure 16 shows that the ranking of degree of bias has changed: (from weakest to strongest) U. large-cap.

and China.S.. Figure 17 24 of 38 .S. we can use bid-ask spread data. for the U. large-caps and small-caps. The variable ‘usbidaskfrac’ and its powers are calculated as: usbidaskfrac = 2 closingask − closingbid . It also includes interaction variables that accounts for the possibility that bid-ask window may not have an equal impact on U. usbidaskfrac 2 = ( usbidaskfrac ) closingprice Regression (2) in Figure 17 takes into account that ‘usbidaskfrac’ may have a non-linear effect on degree of round number bias. which directly measures the window of prices surrounding a possible round number.Because volume may not have an equal impact across U.S.

and China.The results here support the previous results that were found using volume as a proxy for liquidity. small-cap trading at around $23 with a bid-ask fraction of 0. possibly due to the already narrow spread in big stocks.S small-cap investors seem to be inherently more biased toward round numbers. However. ifone = −..S.S. The negative coefficient on ‘big’ means that U.40671 × big × usbidaskfrac +0. Discussion.1516 100 * ifone . in characteristics and motives.. The coefficients can be interpreted similarly as before.0349 Pricelevel ∆ weightedifone = Overall. a U.S. Kumar (2009) shows that in U. so that higher spread induces more bias.S. so that higher bid-ask spread induces bias for small stocks more so than for big stocks. All this is consistent for prices that end in two round decimals or just one. individual investors with lower income and less education tend to 25 of 38 .S. This finding can be explained by the fact that investors of largecaps and small-caps are different in U. For example. Note that the coefficients on ‘usbidaskfrac’ is positive as expected. smaller stocks exhibit less bias. smaller stocks exhibit more bias. big stocks exhibit less bias holding constant price level and bid-ask ratio. the coefficients on the interaction term ‘bigxusbidask’ is negative.04613 × big × bidaskfrac 2 − .01 has an 0. U.14755 × big − . than if it were a large-cap: ∆ usweightedifone = −. while in China.Price Clustering Adjusted for Liquidity and Price Levels It seems contradictory that in the U.00087 × big × usbidaskfrac 3 = −0.0349 lower probability of observing the last decimal as round.

and that volume may not be a good control for liquidity effect in round number bias (see “Discussion. even when there should be more noise trading in China. Jiang. or due to investors slowly adjusting to the recent decimal system for trading stocks. It is very possible that because of different market conditions and laws around trading. Further studies can be done with bid-ask spread data for this data set. Zhao (2012) find that in China. more educated households in developed areas for status reasons (“Keeping up with the Wangs”). however.S. Lim. while turnover in large-caps are driven by existing holders who are merely “trading around” their positions (Cevik. Also small-cap stocks are more likely to sell-out or buy-in completely. even using future data to avoid the lingering effects of decimalization. most of clustering in U. giving small-cap stocks more speculative qualities and more room for bias. As we saw in Figure 13. small local stocks are traded more by richer. These investors may actually be more sophisticated than investors who trade large-caps.S. large-caps have more analyst coverage (Bhushan.Abnormal Returns”). resulting in less bias in Chinese small-caps. their investors are are more likely to take a new position or exit entirely.S. U. 26 of 38 . The most important explanation. After accounting for liquidity and price level effects. Thomson Reuters). is probably the selection of the time period. Stein 2000).S. it is surprising to see that overall. Hong. occurred earlier in the decade. U. and decreased dramatically over the years. volume in U. has different impact than volume in China. with prices adjusting faster to new information (Hong. 1989) and more information available than small-caps. On the other hand. which never affected Chinese investors. data would still be similarly biased as Chinese data. reducing round number bias. This can be due to the narrowing bid-ask spread.gamble in small and local stocks. with the final few years exhibiting less bias than in Chinese data.

and then take its next day lagged returns. we scale up to percentage return. 27 of 38 .VI. which is frequency of seeing ‘one’ or ‘two’ round decimals weighted by the inverse of their closing price. Abnormal Returns Like price clustering. having a larger bid-ask window (more round numbers to choose from) will allow for more biases. Again. abnormal returns based on round numbers is complicated due to the obvious positive correlation between bid-ask spread and probability of trading on a round number: given that investors gravitate toward round number prices. and use its powers. so that the greater the variables. For Chinese data. we use weighted frequency. Because daily rate of return is small. we use ‘volumeCHN’ (measured in millions of shares) as a measure of liquidity due to the inaccessibility of bid-ask spread. the more serious the biases. ret = 100 * RET . ‘volumeCHN2’ and ‘volumeCHN3’ as before to take into account nonlinearity. Variables ‘weightedifone’ and ‘weightediftwo’ are meant to capture degree of bias net of price levels.

with next-day returns in percentages: 28 of 38 .Figure 18 The variables ‘weightedifoneCHN’ and ‘weightediftwoCHN’.S. we use bid-ask fraction instead of volume. For U. are not statistically significant in any of the regressions. and has little explanatory power on next day returns. and does not seem to be capturing liquidity premium (see later “Discussion”). Volume surprisingly has a positive effect on next day returns. data sets.

S. more bias in one-decimal similarly means lower returns. the effect of having both decimals as round is surprisingly large and positive. with two-decimals having even more effect.03487% lower next day return than if it were not round. a stock trading at $23. more bias (in both one and two decimals) means lower next day returns. generating higher next day returns. coefficients may be hard to interpret. However. 29 of 38 . holding constant bid-ask fraction. For example. there is causal and statistic significance for degree of bias (weightedifone. strong enough to overwhelm the usual negative effect from round number bias. For large-caps.Figure 19 Regression (2) in the above Figure 19 shows that in the U.40 (only last decimal as round) is expected to have a -0.) on next day returns. For small-caps.. Due to weighing of the variables. for large-caps. etc.

Mei. Scheinkman.03445 × weightediftwo × US × big = . and Xiong (2009) find that trading volume of Chinese shares was not mainly a result of liquidity.40 For a small-cap stock trading at $80. In our regression. where more volume resulted in higher next day returns (see “Discussion”). Truong.01452% We also observe that next day returns are increasing in bid-ask spread fraction. This could be due to using volume. so that our bid-ask measure have captured liquidity premium. volume had positive and significant explanatory power on next day returns. Naughton. which may not be a good control for liquidity.03487% 23.00816 × weightedifoneUS − .01467 × weightediftwoUS = -. and Veeraraghavan (2007) found no strong link between volume and returns.00 (both decimals round): ∆ retUS = −0. ∆ retUS = −0. Discussion.01467 × weightediftwoUS +. and Lee and Rui (2000) found that 30 of 38 . ∆ retUS = −0. which failed to take into account liquidity effect in our data.00816 × weightedifoneUS − . This was the opposite when regressing Chinese returns (Figure 18) using volume as a liquidity measure.Abnormal Returns In China. round number bias seemed to have no explanatory power in next day returns in our regression.02854% But if it were a large-cap stock: ∆ retUS = −. Our findings on volume is also inconsistent with previous literature.00816 × weightedifoneUS .weightedifoneUS = 100 * ifone .

This analysis can be repeated in the future by someone with access to data on Chinese bid-ask spread as a measure of liquidity.trading volume does not Granger-cause stock market returns on any of China’s four stock exchanges. smallcaps is supported by past literature. we saw negative excess returns for round numbers. and negative return for prices just below.S. It is also supported by Johnson. The following figure from JJS (2008) shows midpoint-based excess returns by last digit of previous-day closing price: Figure 20 31 of 38 . In the U.S. Johnson. and finds positive return for prices ending in $X. and Shanthikumar (2008).. who find returns following closing prices just above a round number are significantly higher than returns following prices just below. for which it was positive. Negative returns in U. except for large-cap stocks ending in two round decimals.01. Wang (2011) finds psychological bias toward round numbers.

but was uncertain whether the effect would be weaker or greater. Future studies can look into this by taking more lagged returns. small-caps and largecaps in our data.S. data clustered significantly more than Chinese data questions whether U.S.for example. The higher return in large-caps can be explained by disproportionate amount of media attention that the big stocks attract when surpassing an important barrier. Conclusion Because many previous studies have found positive results but with different data sets and older time periods. usually a round number. across China and U. next day returns may be higher. The increase in sophistication and narrowing of bid-ask spread should give investors less chances to manifest round number bias. VII.S. They also find that there were no support and resistance levels in less popular indices. Donaldson and Kim (1993) found support and resistance levels in round numbers in DJIA. driving up sentiment. price clustering effect was significant and robust. Indeed. but excess returns two days or a week later may be negative. we expected to find similar robustness in clustering in newer data. which is only an index that is arbitrarily scaled. After observing each year 32 of 38 . However.S. but may be countered by increase in noise trader participation. seeing that U. large and small caps. and round numbers do not say much about fundamentals. both in direction and magnitude. investors are inherently more biased.The excess return around ‘0’ in JJS (2008) above is consistent with U..

S.S.88 for China. which was positive.S.individually in the 2001-2011 data. we saw that round number clustering in the U. may be more speculative than large-cap traders. but for U. a contradictory finding is that there is more round number clustering for small-caps in the U.S. After controlling for liquidity and price level effects that have amplified bias for U.S. has decreased dramatically after the decimalization of stock markets. for prices in $X00.S. stocks. large-caps when they hit significant barriers. This suggest that small-cap traders in China may be more sophisticated than large-cap traders. However. This can justify short-term momentum strategies for U. We have only looked at excess returns for numbers ending in ‘0’s. has decreased substantially as the bid-ask spread has narrowed.50 or $X. Generally.25. and even X.. As for excess returns.S.S.88 for China. and future studies can expand the definition of “round number” to include $X. or X88. small-cap and large-cap stocks showed negative next-day excess return around round numbers. but small-cap traders in U. data. with the exception of large-caps ending in two round decimals. The positive excess return can be explained by the disproportionate amount of media attention it receives and the resulting sentiment. it would be interesting to see whether it is due to 33 of 38 . which showed clustering in our analysis. The findings of this paper opens up interesting topics for future research. Given that clustering in U. to match that of the Chinese. but large-caps in China. we see that the degree of round number bias is similar for U. and China. At the same time. It would be more interesting to extend past the decimal point. analysis can be done with leading digits to see which attracts more bias. our findings were inconclusive for Chinese stocks. findings were consistent with past literature.00.

increased sophistication of institutional traders. 34 of 38 . or due to decreased bid-ask spread due to increased liquidity. or due to steady adjustment to the new decimal system.

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