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Culture and Stock Price Clustering: evidence from the Peoples' Republic of China, Brown and Mitchell, 2004
Price clustering is the tendency of prices to be observed more frequently at some numbers than others. It results from human bias and from haziness or imprecise beliefs about underlying value. Some numbers, such as those ending in zero or 5, are traditionally more salient. Market agents tend to settle on more salient numbers when submitting an order or quoting a price. To many Chinese, the number "8" is salient because it is considered "lucky", while "4" is "unlucky" and to be avoided. We conduct a tightly controlled experiment to determine whether a culturally heuristic number preference exists, by studying trading on the Shanghai and Shenzhen stock exchanges, which have been relatively segmented along cultural lines. Our results are extremely clear. For much of our sample period (1994-2001), the prices of A-shares (mostly held by Chinese organisations or individuals) traded on the Shanghai stock exchange were more than twice as likely to end in 8 as 4.
Price clustering and natural resistance points in the Dutch stock market: a natural experiment, Sonnemans, 2003
"The next explanation is from the marketing literature and cognitive psychology. Odd pricing (also called odd-ending pricing or just-below pricing) is very common in marketing of consumer goods (e.g. Holdershaw, Gendall and Garland 1997, Stiving and Winer 1997, Schindler and Kirby 1997). It means that the price is just below some round number (for example $9.99 instead of $10.00). Consumers (or at least some of them) tend to consider the odd price as significantly lower than the round numbered price. Humans may process and store numerical information in a way that the first digits, which contain more significant information than later digits, are treated as more valuable information (Brenner and Brenner 1982). To compare two numbers a left-to-right comparison (first compare the hundreds, if these are the same the tens, etc) is a very efficient procedure. The human tendency to overemphasize the first digits can also be observed in time measurement. Passing from an age of 39 to 40 is considered by many as a bigger step than for example from 38 to 39 or from 40 to 41. In a financial market it would mean that a stock price of 30 would be considered (much) higher than a price of 29.9. A seller will be relatively happy to sell at 30 (and more limit sell orders will be placed at 30) while a buyer would be reluctant to pay a price that is not in the 20s but in the 30s. Note that the odd pricing hypothesis predicts that round number effects in guilders would immediately cease to exist in January 1999 and round number effects in euros would immediately show up".
Currency Orders and Exchange-Rate Dynamics: Explaining the Success of Technical Analysis, Osler, 2001
"This paper provides a microstructural explanation for the success of two familiar predictions from technical analysis: 1) trends tend to be reversed at predictable support and resistance levels, and 2) trends gain momentum once predictable support and resistance levels are crossed".
A Model for Ordered Data with Clustering of Observations, Harris and Fry, 2001
"Such a multimodal distribution may be the result of individuals being captive to particular choices. Such a case arises when there is digit preferencing (particular numbers, such as 0, 5 and 101 are often favored in many survey-based data sets). This paper introduces a new discrete choice model, the Dogit Ordered Extreme Value (DOGEV), that does account for both ordering and digit preferencing in the data, and applies it to an Australian Inflationary Expectations data set".
A New Look at Clustering of Stock Prices, NIEDERHOFFER, 1966
"Let us consider the case of a small investor who recently bought a stock at 72 and would like to sell somewhere about 80. He would be well advised to place his sell-limit order at 79.9 rather than at 80. On the average, there will be a greater concentration of sell orders at 80 than at any other nearby prices. The sell orders create a bearish effect, but the investor must decide whether the benefits from a quick sale at 79.9 are worth the possible sacrifice of 0.1 point. On the other hand, if a mutual fund contemplated the purchase of this stock after it broke through 80 and rose to 99.9, it might be wiser for them to postpone the purchase until the issue traded at 100, just long enough to cover all the sell limits at 100 except for an amount sufficient to match their purchase order. The reason for this is that so many sell-limit orders are placed at the fascinating figure of 100 that the great volume of these orders would act as a resistance to an advance beyond 100".
Clustering in the Futures Market: Evidence from S&P 500 Futures Contracts, Schwartz, and Van-Ness, 2003
"While trade price clustering is evident throughout time to maturity of these contracts, there is a dramatic change when the S&P 500 futures contract is designated a front-month contract (decrease in clustering) and a back-month contract (increase in clustering). We find that trade price clustering is a positive function of volatility and a negative function of volume or open interest. In addition, we find a high degree of clustering in the daily opening and closing prices, but a lower degree of clustering in the settlement prices".
Stock Price Clustering and Discreteness, Harris, 1991
"Stock prices cluster on round fractions. Clustering increases with price level and volatility, and decreases with capitalization and transaction frequency. Clustering is pervasive".