Global Market Inefficiencies
69 Pages Posted: 2 Aug 2017 Last revised: 30 Aug 2021
Date Written: September 13, 2017
Using point-in-time accounting data, we estimate monthly fair values of 25,000 stocks from 36 countries. A trading strategy based on deviations from fair value earns significant risk-adjusted returns (“alpha”) in most regions, especially the Asia Pacific, that are unrelated to known anomalies. The strategy’s 40-70 basis point per month alpha difference between emerging and developed markets contrast with prior research findings. A country’s pre-transaction-cost alpha is positively related to its trading costs, but exceeds country-specific institutional trading costs. Thus, global equity markets are inefficient, particularly in countries with quantifiable market frictions, like trading costs, that deter arbitrageurs.
Keywords: International finance, valuation, asset pricing, market efficiency, fundamental analysis, Point-in-Time, Theil-Sen, transaction costs, principal components, IPCA
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation