Rationally Mispriced Stocks

92 Pages Posted: 7 Jan 2019 Last revised: 17 Jul 2023

See all articles by Oleg Chuprinin

Oleg Chuprinin

UNSW; Financial Research Network (FIRN)

Arseny Gorbenko

Monash University - Department of Banking and Finance

Chang Mo Kang

Hanyang University - School of Business

Date Written: July 15, 2023


We describe a theoretical mechanism that determines how mispricing is distributed in the cross-section of stocks in equilibrium. This mechanism does not involve common frictions that limit arbitrage but is entirely based on the rational allocation of information acquisition resources by professional investors. Our main results are that mispricing not eliminated by arbitrage trading is greater in smaller stocks and that capital constrained investors find it optimal to self-select into small-cap styles. Our empirical investigation of institutional trading, portfolios, and information acquisition activities confirms these predictions. In the cross-section of stocks, size tends to explain mispricing better than any explicitly measured friction, suggesting that most of the variation in mispricing can be attributed to a rational channel.

Keywords: mispricing, information discovery, institutional trading

JEL Classification: G11, G14

Suggested Citation

Chuprinin, Oleg and Gorbenko, Arseny and Kang, Chang Mo, Rationally Mispriced Stocks (July 15, 2023). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3285757 or http://dx.doi.org/10.2139/ssrn.3285757

Oleg Chuprinin (Contact Author)

UNSW ( email )

Room 349, UNSW Business School
High St
UNSW Sydney, NSW 2052
406674419 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

Arseny Gorbenko

Monash University - Department of Banking and Finance ( email )

900 Dandenong Road
Caulfield East
Melbourne, Victoria 3145

Chang Mo Kang

Hanyang University - School of Business ( email )

222, Wangsimni-ro

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