Mispricing Decomposition and Global Mispricing Index

49 Pages Posted: 19 Jan 2023 Last revised: 16 Mar 2024

See all articles by Vitor Azevedo

Vitor Azevedo

Department of Financial Management - RPTU Kaiserslautern-Landau

Minghui Chen

Technische Universität München (TUM) - Department of Financial Management and Capital Markets

Christoph Kaserer

Technische Universität München (TUM)

Sebastian Müller

Technische Universität München (TUM) - TUM School of Management

Date Written: January 17, 2023

Abstract

We propose a novel proxy for global equity mispricing (mispricing R2) based on an instrumented principal component analysis, which relies on return variation across mispricing anomalies. We find that mispricing R2 is higher for countries with lower market development, accounting quality, and higher limits to arbitrage. Feature reduction methods show that stock market importance and short-sale constraints are the main drivers of market mispricing. Unlike prior studies, we find that mispricing is stronger during periods of low investor sentiment. Furthermore, momentum and distress emerge as the most influential firm characteristics driving market mispricing. Our results reveal substantial differences in market efficiency across the globe.

Keywords: Mispricing; stock market anomalies; market efficiency; instrumented principal components analysis (IPCA)

JEL Classification: G12, G41, M41

Suggested Citation

Azevedo, Vitor and Chen, Minghui and Kaserer, Christoph and Müller, Sebastian, Mispricing Decomposition and Global Mispricing Index (January 17, 2023). Available at SSRN: https://ssrn.com/abstract=4326763 or http://dx.doi.org/10.2139/ssrn.4326763

Vitor Azevedo (Contact Author)

Department of Financial Management - RPTU Kaiserslautern-Landau ( email )

Kaiserslautern
Germany

Minghui Chen

Technische Universität München (TUM) - Department of Financial Management and Capital Markets ( email )

Munich, 80333
Germany

Christoph Kaserer

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 289 25489 (Phone)
+49 89 289 25488 (Fax)

HOME PAGE: http://www.cefs.de

Sebastian Müller

Technische Universität München (TUM) - TUM School of Management ( email )

Germany

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