Limited cognition and clustered asset prices: Evidence from betting markets

Alasdair Brown (Lead Author), Fuyu Yang

Research output: Contribution to journalArticlepeer-review

16 Citations (Scopus)
17 Downloads (Pure)

Abstract

Asset prices tend to cluster at round numbers. We examine betting exchange data on U.K. horse races to establish whether limited cognition is partially responsible for this clustering. The key tool in this study is the stark increase in cognitive load faced by traders during races compared to prior to races. Using an approach that is part regression discontinuity and part difference-in-differences, we find that traders exhibit a substantially higher propensity to quote round numbers, rather than the nearest non-round numbers, during races. This result is robust to a series of placebo tests.
Original languageEnglish
Pages (from-to)27–46
Number of pages20
JournalJournal of Financial Markets
Volume29
Early online date28 Jan 2016
DOIs
Publication statusPublished - Jun 2016

Keywords

  • Limited cognition
  • Price clustering
  • Regression discontinuity
  • Difference-in-differences

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