Exploring the psychology of price barriers in Baltic stock markets

PurposeThe purpose of this study is to investigate the presence of psychological barriers both in the main stock market indices of the Baltic states and the most actively traded individual stocks. A psychological barrier refers to a specific price point, often at round numbers (i.e. powers of 10), t...

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Bibliographic Details
Published in:Baltic Journal of Management 2024-07, Vol.19 (6), p.94-110
Main Authors: Lobão, Júlio, Lopes, João G.
Format: Article
Language:English
Subjects:
Barriers
Behavior
Cognitive load
Decision making
Dow Jones averages
Efficient markets
Emerging markets
Foreign exchange rates
Hypotheses
Influence
Investment strategy
Investments
Investors
Price levels
Proximity
Psychology
Securities markets
Stock exchanges
Stock prices
Stocks
Tests
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Summary:PurposeThe purpose of this study is to investigate the presence of psychological barriers both in the main stock market indices of the Baltic states and the most actively traded individual stocks. A psychological barrier refers to a specific price point, often at round numbers (i.e. powers of 10), that investors believe is challenging to breach, influencing their behavior and trading decisions.Design/methodology/approachWe conduct uniformity tests and barrier tests, such as barrier proximity tests and barrier hump tests, to evaluate the presence of psychological barriers. Additionally, we explore variations in means and variances near these potential barriers using regression and GARCH analysis.FindingsThe findings reveal that psychological barriers do exist in the Baltic stock markets, particularly within market indices. The Estonian market index stands out with the most pronounced indications of psychological barriers. Individual stocks also display significant changes in means and variances related to potential barriers, albeit with less uniformity.Practical implicationsCollectively, our findings challenge the traditional assumption of random returns within the Baltic stock markets. For practitioners, the finding that psychological barriers exist opens up opportunities for investment strategies that can capitalize on them.Originality/valueThis study is the first to comprehensively investigate psychological barriers in the Baltic stock markets. Our results provide a valuable contribution to understanding the impact of that phenomenon on pricing dynamics, which is particularly pertinent in less-researched frontier markets like the Baltic states.
ISSN:1746-5265
1746-5273
DOI:10.1108/BJM-10-2023-0407