Bonds, Stocks, and Sources of Mispricing

78 Pages Posted: 2 Nov 2017 Last revised: 29 Mar 2019

See all articles by Doron Avramov

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah

Tarun Chordia

Emory University - Department of Finance

Gergana Jostova

George Washington University - Department of Finance

Alexander Philipov

George Mason University - Department of Finance

Date Written: March 27, 2019

Abstract

This paper shows that distressed stocks and bonds are overpriced during high sentiment periods. The correction of overpricing leads to a range of anomalous cross-sectional patterns in stock and bond returns. Including bonds as additional test assets allows us to develop testable restrictions about overpricing rationales related to lottery-type preferences, shareholders' ability to extract value during bankruptcy, and market sentiment. It also reinforces the notion that anomaly payoffs are unexplained by co-movement with risk factors. The evidence suggests that anomalies are attributable to sentiment-driven investors' (both retail and institutional) excessive optimism about the likelihood and consequences of financial distress.

Keywords: sentiment, mispricing, anomalies, bonds, stocks, financial distress

JEL Classification: G12, G14

Suggested Citation

Avramov, Doron and Chordia, Tarun and Jostova, Gergana and Philipov, Alexander, Bonds, Stocks, and Sources of Mispricing (March 27, 2019). George Mason University School of Business Research Paper No. 18-5. Available at SSRN: https://ssrn.com/abstract=3063424 or http://dx.doi.org/10.2139/ssrn.3063424

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Gergana Jostova (Contact Author)

George Washington University - Department of Finance ( email )

2201 G St NW
Funger Hall, Suite 501
Washington, DC 20052
United States
202-994-7478 (Phone)

HOME PAGE: http://home.gwu.edu/~jostova

Alexander Philipov

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://mason.gmu.edu/~aphilipo

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