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Sonnemans, Joep
Year of Publication: 
Series/Report no.: 
Tinbergen Institute Discussion Paper 03-043/1
The main contribution of this study is the finding that round numbers can act aspricebarriers for individual stocks. In addition, a first step is made to explain this and therelated phenomena of round number clustering by testing two competing hypotheses,using data from the Dutch stock market during 1990-2001. After January 1, 1999stock prices were listed in euros, while guilders were still the currency of daily lifeuntil 2002. According to the aspiration level hypothesis investors will have targetprices for the stocks they own. This hypothesis predicts that round number effects inguilders will only slowly disappear. The odd price hypothesis originates fromcognitive psychology and marketing. Humans have to tendency to compare numbersdigit by digit from left to right, and therefore consider an odd price of 19.90 asconsiderable less than 20.00. This hypothesis predicts an abrupt change in roundnumber effects after January 1, 1999. The results reject the aspiration level hypothesisand are in line with the odd price hypothesis.
behavioral finance
natural experiment
price clustering.
Document Type: 
Working Paper

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