Bonds, Stocks, and Sources of Mispricing

62 Pages Posted: 2 Nov 2017  

Doron Avramov

Hebrew University of Jerusalem - Jerusalem School of Business Administration; The Chinese University of Hong Kong (CUHK)

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: January 1, 2017

Abstract

Market-wide sentiment and firm-level financial distress jointly drive asset overpricing. The intersection of high sentiment and financial distress characterizes episodes of inflated bond and stock prices, to the extent that these securities are correctly priced otherwise. Overvaluation is attributable to sentiment-driven investors, both retail and institutional, who underestimate the severe implications of financial distress for a firm's future prospects. Anomalous patterns in the cross-section of stock and bond returns emerge as overpricing is corrected.

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 (January 1, 2017). 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

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~davramov/

The Chinese University of Hong Kong (CUHK)

Shatin, N.T.
Hong Kong
Hong Kong

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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