Psychological Barriers on the Dutch Stock Exchange

The Dutch AEX and six of its constituents are examined for indications of psychological barriers. Often these barriers are associated with support and resistance levels and with a bandwagon effect. These effects are extensively investigated by studying clustering effects, return and volatility dynamics and crossing effects in the vicinity of hundred levels for the AEX and ten levels for the individual stocks. All tests explicitly allow for asymmetries across upward and downward price movements. Hundred levels of the AEX appear to function more or less as support and resistance levels. These barriers are less frequently approached and crossed than arbitrary index levels and in their vicinity conditional mean returns and variances are altered. Clustering and crossing effects of individual stocks cannot be consistently related to the existence of psychological barriers. As they do show return effects and some variance effects in the vicinity of ten levels, the existence of psychological barriers is not convincingly rejected. For both the AEX and its constituents the reaction of investors to upward and downward price movements turns out to be asymmetric in nature, indicating that it does make sense to allow for these asymmetries in barrier testing. Sentiments appear to be more sensitive to downward barrier breakings.