The Real Effects of Market Inefficiency: Aggregate Versus Cross-Sectional Mispricing

34 Pages Posted: 24 Apr 2018

See all articles by Harjoat Singh Bhamra

Harjoat Singh Bhamra

Imperial College Business School

Huafeng (Jason) Chen

Fudan University - Fanhai International School of Finance (FISF)

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business

Date Written: April 4, 2018

Abstract

We study the real cost of market inefficiency, distinguishing between two types of market inefficiency: aggregate and cross-sectional mispricing. We argue that the real cost of cross-sectional mispricing is more severe than that of aggregate mispricing. The aggregate mispricing has a relatively small cost because the wealth effect and the substitution effect tend to offset each other.

Keywords: Market Efficiency, Equilibrium Asset Pricing

JEL Classification: G12, G14

Suggested Citation

Bhamra, Harjoat Singh and Chen, Huafeng (Jason) and Garlappi, Lorenzo, The Real Effects of Market Inefficiency: Aggregate Versus Cross-Sectional Mispricing (April 4, 2018). Available at SSRN: https://ssrn.com/abstract=3156782 or http://dx.doi.org/10.2139/ssrn.3156782

Harjoat Singh Bhamra

Imperial College Business School ( email )

Tanaka Building
Exhibition Rd
London, SW7 2AZ
United Kingdom

HOME PAGE: http://www.harjoatbhamra.com

Huafeng (Jason) Chen (Contact Author)

Fudan University - Fanhai International School of Finance (FISF) ( email )

220 Handan Road
Shanghai, 200433
China

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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