Mispricing Revealed Through the Information Ratio

60 Pages Posted: 21 Apr 2023 Last revised: 6 Jul 2023

See all articles by Mehran Azimi

Mehran Azimi

University of Massachusetts Boston - Department of Accounting and Finance

Date Written: January 1, 2023

Abstract

We document that the Information ratio identifies overpriced and underpriced stocks. The contrarian strategies based on 60 information ratios generate an average monthly Carhart alpha (with a t-stat)
of 0.63% (4.5). The performance is not due to past returns, volatility, various characteristics, market
microstructures, and investors’ lottery-related preferences. Factors from ten prominent factor models, including the mispricing factors of Stambaugh and Yuan (2017), do not explain the results. Our analysis of the timing and evolution of the identified mispricing and its relation with firm fundamentals suggests that the conditional realized information ratio is a proxy for the stock-level sentiment

Keywords: Mispricing, Sentiment, Cross-Section of Stock Returns, Realized Sharpe Ratio, Information Ratio, Momentum, Reversal, Idiosyncratic Volatility

JEL Classification: G12

Suggested Citation

Azimi, Mehran, Mispricing Revealed Through the Information Ratio (January 1, 2023). Available at SSRN: https://ssrn.com/abstract=4413589 or http://dx.doi.org/10.2139/ssrn.4413589

Mehran Azimi (Contact Author)

University of Massachusetts Boston - Department of Accounting and Finance ( email )

Boston, MA 02125
United States

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