Global Mispricing Matters

Abstract

This paper constructs a global anomaly index based on the 153 long-short portfolio returns of 33 stock markets. We find that global anomaly index is a strong negative predictor of future aggregate stock returns in international markets both in- and out-of-sample. It captures the common changes in overpricing across stock markets, and is not subsumed by the extant well-known stock return predictors. The predictive power of global anomaly index arises from globally widespread stronger mispricing correction persistence for overpricing relative to underpricing, and partly from the predictive ability to forecast future sentiment-changes. We provide evidence that global mispricing is an important pricing factor for predicting aggregate stock returns around the world.

Keywords: Long-short anomaly portfolio return, International stock markets, Return predictability, Global mispricing, Sentiment

JEL Classification: G12, G14, G15