Nonlinear Effects of Market Development on Pricing Anomalies
61 Pages Posted: 30 Sep 2016 Last revised: 28 Oct 2018
Date Written: October 26, 2018
Previous literature finds surprising evidence that pricing anomalies appear to be at least as prevalent in developed markets as in emerging markets, namely the global anomaly puzzle. We show that while market development and newswatcher efficiency are linearly related, newswatcher efficiency has a nonlinear impact on pricing anomalies. In extremely low efficiency regimes, without newswatchers sowing the seeds of price discovery and ensuring the long run convergence of price to its fundamental value, the process of initial mispricing and subsequent correction will not occur. The concentration of emerging countries in low efficiency regimes provides an explanation of the puzzle.
Keywords: Asset Pricing, Anomalies, Behavioral Finance, Multi-Factor Models, International Evidence
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation