Cognitive Biases and Asset Prices: Evidence from Exchange Repo Market in China

Prior to May 22, 2017, actual daily interest rates of Chinese exchange-traded repos on certain days of the week and on trading days prior to market-closed holidays exhibited remarkable seasonalities. On May 22, 2017, the exchanges changed the way in which rates were displayed such that investors need no longer infer actual repo maturities. Thereafter, the seasonalities disappeared. We interpret the seasonalities and their disappearance as being due to investors employing an ease-of-processing heuristic that was not required after May 22, 2017. An implication is that a cognitive bias on the part of investors caused the seasonalities in asset prices.