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Mispricing, market anomalies, and investor behaviour
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Motahari, Mershad (2019) Mispricing, market anomalies, and investor behaviour. PhD thesis, University of Warwick.
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Official URL: http://webcat.warwick.ac.uk/record=b3440033~S15
Abstract
In Chapters 2 and 3, I focus on investors preference for skewness. There is an emerging line of behavioural finance research showing that there is a group of investors in the market that have a preference to hold positively-skewed positions at the expense of under-diversification. This preference then leads to stocks with higher levels of skewness to be overpriced and generate lower market returns. In particular I demonstrate how the preference for skewness can play a bigger role in explaining market anomalies.
I begin by looking at the profitability premium in Chapter 2. I find that less profitable forms in the cross-section exhibit higher measures of skewness than their more profitable counterparts. Because of this, investors with a preference for skewness are attracted towards less profitable firms and away from more profitable ones, inter alia contributing to the profitability premium. In Chapter 3, I take a more holistic approach and consider the common mispricing-related component of 11 prominent market anomalies. I show that the anomaly strategies, to the extent that are related to mispricing, are driven by the preference for skewness. I also introduce a factor that captures skewness- related mispricing and improves the performance of conventional asset pricing models in explaining anomalies.
Finally, in Chapter 4. I document a phenomenon not studied before. That is, stocks in specific states and industries have higher levels of mispricing in terms of anomalous market behaviour. The most mispriced states do not necessarily stay mispriced for longer that 12 months, on average. However, the most mispriced industries continue to be mispriced even after 60 months. I show that state-level mispricing is likely due to heterogeneous investor sentiment and noise trading across states. Industry-level mispricing, on the other hand, is linked to earnings forecast errors made by analysts. I believe such a novel perspective on market pricing is completely original to the literature.
Item Type: | Thesis (PhD) | ||||
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Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
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Library of Congress Subject Headings (LCSH): | Stock exchanges -- Prices, Investment analysis, Investments -- Decision making, Finance -- Psychological aspects | ||||
Official Date: | April 2019 | ||||
Dates: |
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Institution: | University of Warwick | ||||
Theses Department: | Warwick Business School | ||||
Thesis Type: | PhD | ||||
Publication Status: | Unpublished | ||||
Supervisor(s)/Advisor: | Taffler, Richard J. ; Kumer, Alok | ||||
Format of File: | |||||
Extent: | x, 156 leaves : illustrations | ||||
Language: | eng |
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