Pricing Deviation, Misvaluation Comovement, and Macroeconomic Conditions

55 Pages Posted: 25 Aug 2012

See all articles by Eric C. Chang

Eric C. Chang

University of Hong Kong - School of Business

Yan Luo

Fudan University

Jinjuan Ren

University of Macau

Date Written: August 24, 2012

Abstract

We measure individual stocks' misvaluation based on their firm-specific deviations from predicted intrinsic values. The misvaluation measure exhibits association with stocks' valuation uncertainty and arbitrage difficulty, and has significant power to forecast stock returns incremental to size, book-to-market ratio, momentum, and various return anomalies. Based on the misvaluation measure, we form a misvaluation factor and find that stocks' return covariances with this factor strongly predict the cross-section of returns even after the control of stocks' sensitivities to other return factors. We further show that the misvaluation factor and market-wide misvaluation waves predict future macroeconomic conditions, which provides further insights into the pricing of systematic misvaluation in the market.

Keywords: Misvaluation, comovement, factor models, market efficiency, macroeconomic conditions

JEL Classification: G12, G14

Suggested Citation

Chang, Eric Chieh C. and Luo, Yan and Ren, Jinjuan, Pricing Deviation, Misvaluation Comovement, and Macroeconomic Conditions (August 24, 2012). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2135439 or http://dx.doi.org/10.2139/ssrn.2135439

Eric Chieh C. Chang (Contact Author)

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Yan Luo

Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Jinjuan Ren

University of Macau ( email )

Room 4079, E22, Faculty of Business Administration
University of Macau
Taipa, Taipa Nil
Macau
(853) 8822-4185 (Phone)

HOME PAGE: http://www.umac.mo/fba/staff/susanren.html

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