Mispricing and Uncertainty in International Markets

45 Pages Posted: 16 Feb 2021 Last revised: 10 Mar 2021

See all articles by Mirela Sandulescu

Mirela Sandulescu

University of Michigan, Ross School of Business

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Date Written: November 2, 2020

Abstract

We develop Residual MisPricing (RMP), an index capturing mispricing relative to a linear benchmark asset pricing model, from the structure imposed by no-arbitrage. RMP is fully conditional and depends only on the returns of basic assets. Return data for several economies reveal that RMP is countercyclical and related to financial uncertainty. RMP further shows a strong positive relation to conditional international equity and currency risk premia, as well as a close link to market-wide funding liquidity shocks. The relations we document hold in particular out-of-sample. Our evidence points to new record highs for RMP during the COVID-19 era, similar to its behavior in the 2008 financial crisis.

Keywords: stochastic discount factor, residual mispricing, financial uncertainty, exchange rates, machine learning.

JEL Classification: G11, G12, G15

Suggested Citation

Sandulescu, Mirela and Schneider, Paul Georg, Mispricing and Uncertainty in International Markets (November 2, 2020). Swiss Finance Institute Research Paper No. 21-14, Available at SSRN: https://ssrn.com/abstract=3785528 or http://dx.doi.org/10.2139/ssrn.3785528

Mirela Sandulescu (Contact Author)

University of Michigan, Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Paul Georg Schneider

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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