Mispricing and the cross-section of stock returns |
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Authors: | Carl R. Chen Peter P. Lung F. Albert Wang |
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Affiliation: | (1) University of Dayton, 300 College Park, Dayton, OH 45469-2251, USA;(2) University of Texas, Arlington, USA |
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Abstract: | This paper employs the Campbell-Shiller (Rev Financ Stud 1:195–228, 1988) VAR model to derive a model-based mispricing measure that captures investor overreaction to growth. Using this mispricing measure, we find that stocks with low levels of mispricing outperform otherwise similar stocks. The long–short mispricing strategy generates statistically and economically significant returns over the sample period of July 1981 to June 2006. Moreover, this mispricing strategy outperforms the contrarian strategy using various accounting-fundamental-to-price ratios. Our results cast doubt on the risk story in explaining the abnormal returns of the mispricing strategy. Rather, our evidence suggests that asset prices reflect both covariance risk and mispricing. |
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Keywords: | Model-based mispricing Investor overreaction Mispricing strategy Contrarian strategy Price– dividend ratio Stock return predictability Cross-section of stock returns |
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