Work

Pricing Deviation, Misvaluation Comovement, and Macroeconomic Conditions

Year: 2012

Type: article

Abstract: We measure an individual stock’s misvaluation based on the deviation of its price from predicted intrinsic value. Both under- and overvalued stocks identified by this misvaluation measure exhibit greater valuation uncertainty and arbitrage difficulty, and the misvaluation measure strongly predicts stock returns incremental to size, book-to-market ratio, past returns, and various return anomalies. Based on the misvaluation measure, we form a misvaluation factor and find that stock return covariances with this factor possess significant and robust return predictive power. We further show that the misvaluation factor predicts future economic conditions, providing additional insight into the real effect of systematic misvaluation in the stock market.

Source: Journal of Banking & Finance

DOI: 10.1016/j.jbankfin.2013.08.005

Authors: Eric C. Chang, Yan Luo, Jinjuan Ren

Institutions: University of Hong Kong, Fudan University, University of Macau

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,340

Funder: National Natural Science Foundation of China