Extrapolation beyond peers: An asset pricing perspective

Guohao Tang, Yiyong Wu and Guanyu Lou

Journal of International Money and Finance, 2024, vol. 148, issue C

Abstract: We introduce a novel measure that captures the beta deviation of individual firms from their industry peers within China's stock market. Our analysis reveals that stocks with greater beta deviation generate significantly higher future returns. This predictive power is unaffected by established return predictors and remains robust across alternative peer identification methods, beta estimation techniques, and subsample tests. Our findings suggest a behavioral interpretation, linking positive predictability to mispricing driven by investors' extrapolation biases. Overall, our research highlights the critical role of incorporating peer firms into asset pricing, particularly in emerging markets.

Keywords: Peer firm; Market beta; Industry peers; Extrapolative expectation (search for similar items in EconPapers)
JEL-codes: C21 G11 G12 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:148:y:2024:i:c:s0261560624001402

DOI: 10.1016/j.jimonfin.2024.103153

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