Evidence of psychological barriers in the conditional moments of major world stock indices

Abstract

This study investigates the existence of psychological barriers in the Dow Jones Industrial Average, the S&P 500, and six foreign stock indices. It is believed by many in the investment community that index levels that are multiples of 100 serve as barriers, and that markets may resist crossing these barriers. Although return dynamics in the neighborhood of barrier points are not identical for all series studied, we find aberrations in the conditional means and variances consistent with psychological barriers. In five of the eight indices studied, conditional mean returns are significantly higher after crossing a barrier as part of an upward move, while only two series exhibit significant mean effects after crossing a barrier as part of a downward move. In seven of the eight series studied, we find significant conditional variance effects coincident with a barrier crossing. In addition, most series exhibit evidence of autoregressive conditional heteroskedastic (ARCH), generalized ARCH (GARCH), and leverage effects.

Psychological Barriers in Single Stock Prices: Evidence from Three Emerging Markets

“…It is also noteworthy that the variance tends to be higher in most stocks in post-crossing periods than in pre-crossing periods, which is consistent with the possibility of increased technical trading in the post-crossing period (Cyree et al, 1999).…”

“…They did not find any indication of the existence of psychological barriers in those three indices. Cyree, Domian, Louton and Yobaccio (1999) showed that the last two digits of the DJIA, the S&P 500, the Financial Times U.K. Actuaries (London) and the DAX are not equally distributed. Prices next to barriers turn up less frequently than prices in a more distant position.…”

“…Portanto, é n analisar a dinâmica da série de retornos em torno dessas barreiras, isto é, quanto à variância, a fim de examinar o efeito diferencial sobre os retornos devido aos preços de uma barreira e se essas barreiras foram abordadas em um movimento ascen descendente (Aggarwal & Lucey, 2007;Cyree et al, 1999).…”

“…Therefore, it is necessary to analyse the dynamics of the returns series around these barriers, namely regarding mean and variance in order to examine the differential effect on returns due to prices being near a barrier, and whether these barriers were being approached in an upward or in a downward movement (Aggarwal & Lucey, 2007;Cyree et al, 1999).…”

“…Eq. (3.10) represents this approach assuming autocorrelation similar to in Aggarwal and Lucey (2007) and Cyree et al (1999). Besides the abovementioned dummy variables it includes a moving average parameter and a GARCH parameter.…”