The Limits of Arbitrage and Stock Mispricing: Evidence from Decomposing the Market to Book Ratio

49 Pages Posted: 11 Feb 2017

See all articles by Naji Al-Shammasi

Naji Al-Shammasi

King Fahd University of Petroleum & Minerals (KFUPM) - Department of Finance & Economics (FINEC)

Niranjan Tripathy

University of North Texas

Margie Tieslau

University of North Texas - Department of Economics

Date Written: December 12, 2015

Abstract

We investigate how security specific mispricing may persist under limits to arbitrage; specifically, when arbitragers are limited by the availability of substitutes and financial constraints. We use a part of the market to book decomposition as a proxy for mispricing. The availability of substitutes measure is developed by utilizing the predicted values from a propensity score matching technique based on the Fama and French three-factor model. Arbitrageurs’ financial constraint is captured by the skewness of returns. We find that, on average, stocks with closer substitutes have lower firm specific mispricing, while financial constraints have a positive impact on firm specific mispricing.

Keywords: Limits of arbitrage, mispricing, availability of substitute, financial constraints

JEL Classification: G00, G10, G11, G12

Suggested Citation

Al-Shammasi, Naji and Tripathy, Niranjan and Tieslau, Margie, The Limits of Arbitrage and Stock Mispricing: Evidence from Decomposing the Market to Book Ratio (December 12, 2015). Available at SSRN: https://ssrn.com/abstract=2808817 or http://dx.doi.org/10.2139/ssrn.2808817

Naji Al-Shammasi (Contact Author)

King Fahd University of Petroleum & Minerals (KFUPM) - Department of Finance & Economics (FINEC) ( email )

Saudi Arabia

Niranjan Tripathy

University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

Margie Tieslau

University of North Texas - Department of Economics ( email )

Denton, TX 76203-1457
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
347
Abstract Views
2,021
rank
120,771
PlumX Metrics