Mispricing and Uncertainty in International Markets

Mirela Sandulescu and Paul Schneider
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Mirela Sandulescu: University of Michigan, Ross School of Business
Paul Schneider: University of Lugano - Institute of Finance; Swiss Finance Institute

No 21-14, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We develop Residual MisPricing (RMP), an index capturing mispricing relative to a linear benchmark asset pricing model, from the structure imposed by no-arbitrage. RMP is fully conditional and depends only on the returns of basic assets. Return data for several economies reveal that RMP is countercyclical and related to financial uncertainty. RMP further shows a strong positive relation to conditional international equity and currency risk premia, as well as a close link to market-wide funding liquidity shocks. The relations we document hold in particular out-of-sample. Our evidence points to new record highs for RMP during the COVID-19 era, similar to its behavior in the 2008 financial crisis.

Keywords: stochastic discount factor; residual mispricing; financial uncertainty; exchange rates; machine learning (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2021-02
New Economics Papers: this item is included in nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2114

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