Hedge Funds, Misvaluation, and The HML Factor Returns

40 Pages Posted: 2 Dec 2010 Last revised: 21 Oct 2011

See all articles by Joni Kokkonen

Joni Kokkonen

Catolica-Lisbon School of Business and Economics

Matti Suominen

Aalto University School of Business

Date Written: August 2011

Abstract

We measure misvaluation using the discounted residual income model of Ohlson (1990, 1995). We show that there are significant returns on a long-short portfolio that buys under- and sells short overvalued shares. These returns are highly correlated with the Fama and French HML factor returns and including the returns in a factor model yields the HML factor redundant. Misvaluation spread, defined as the difference in misvaluation between over- and undervalued shares, forecasts both the misvaluation portfolio’s and the HML factor returns. Hedge fund flows reduce the misvaluation spread and the expected returns on the misvaluation portfolio and the HML factor.

Keywords: Hedge funds, mispricing, stock market, market efficiency, HML factor

JEL Classification: G11, G12, G14, G23

Suggested Citation

Kokkonen, Joni and Suominen, Matti, Hedge Funds, Misvaluation, and The HML Factor Returns (August 2011). Available at SSRN: https://ssrn.com/abstract=1717748 or http://dx.doi.org/10.2139/ssrn.1717748

Joni Kokkonen (Contact Author)

Catolica-Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Matti Suominen

Aalto University School of Business ( email )

PO Box 1210
FI-00101 Helsinki
Finland
+358-50-5245678 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
161
Abstract Views
1,395
Rank
336,152
PlumX Metrics