Nonlinear Effects of Market Development on Pricing Anomalies

61 Pages Posted: 30 Sep 2016 Last revised: 28 Oct 2018

See all articles by Charlie X. Cai

Charlie X. Cai

University of Liverpool Management School

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Peng Li

University of Leeds - Leeds University Business School (LUBS)

Qi Zhang

Durham University

Date Written: October 26, 2018

Abstract

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

Cai, Charlie Xiaowu and Keasey, Kevin and Li, Peng and Zhang, Qi, Nonlinear Effects of Market Development on Pricing Anomalies (October 26, 2018). Available at SSRN: https://ssrn.com/abstract=2839799 or http://dx.doi.org/10.2139/ssrn.2839799

Charlie Xiaowu Cai (Contact Author)

University of Liverpool Management School ( email )

University of Liverpool
Liverpool, L69 7ZA
United Kingdom

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

Peng Li

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

Qi Zhang

Durham University ( email )

Old Elvet
Mill Hill Lane
Durham, Durham DH1 3HP
United Kingdom

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