Geography, Local Sentiment, and Market Anomalies

49 Pages Posted: 20 Nov 2018

See all articles by Mehrshad Motahari

Mehrshad Motahari

University of Warwick - Finance Group

Date Written: November 13, 2018

Abstract

This study shows that market anomalies are stronger for stocks headquartered in states with a history of cross-sectional return predictability. Using a combined measure of mispricing based on 11 prominent anomaly strategies, I find that the level of mispricing for a firm's geographic peers predicts how mispriced the firm itself will be in the future. I find similar results when I consider industrial peers instead, but the effect of neither group is absorbed by the other. States in which firm mispricing is more prevalent are those experiencing relatively higher levels of local investor sentiment and better local macroeconomic conditions. Finally, evidence indicates that the predictability of mispricing based on geography and industry is concentrated on stocks with high levels of analyst forecasting errors.

Keywords: Anomalies, Local Predictability, Mispricing, Sentiment, Industry

JEL Classification: G12, G14

Suggested Citation

Motahari, Mehrshad, Geography, Local Sentiment, and Market Anomalies (November 13, 2018). Available at SSRN: https://ssrn.com/abstract=3277128 or http://dx.doi.org/10.2139/ssrn.3277128

Mehrshad Motahari (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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