Mispricing Decomposition and Global Mispricing Index

We introduce a proxy for systematic global equity mispricing (Mispricing R2) based on an instrumented principal component analysis. Mispricing R2 varies across markets and over time, and it strongly correlates with the long-short portfolio returns of technical indicators. It is higher in countries with lower market development, poorer accounting quality, and greater limits to arbitrage. The key drivers of Mispricing R2 are short-sale restrictions and the importance of the stock market at the country level, while momentum and distress are the most influential characteristics at the firm level. Our results reveal substantial differences in market efficiency across the globe.

The data that support the findings of this study are openly available in Mendeley Data at https://data.mendeley.com/datasets/yz8k4p66mt/1

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

JEL Classification: G12, G14, G15

Suggested Citation: 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