Do limits to arbitrage and mispricing explain belief heterogeneity? Evidence from an emerging market

Ahmed Boujlida, Amir Hasnaoui, Ezzeddine Ben Mohamed, Virginie Hachard and Kamel Naoui

Review of Accounting and Finance, 2026, 1-26

Abstract: PurposeThis study aims to examine whether mispricing and limits to arbitrage explain belief heterogeneity in the Tunisian stock market, while accounting for investor sentiment in an emerging market context.Design/methodology/approachUsing portfolio sorting and Fama–MacBeth regressions, this study analyzes stock returns from July 2007 to July 2018. It proposes a new trading–volume-based measure of belief heterogeneity and uses multiple proxies for limits to arbitrage and investor sentiment.FindingsThe results show that stocks with high belief heterogeneity earn lower expected returns. Limits to arbitrage and investor sentiment do not significantly moderate this relationship. However, belief heterogeneity has a stronger effect on undervalued stocks than on overvalued stocks, providing new evidence beyond traditional overvaluation-based explanations.Research limitations/implicationsThe study is limited by its focus on the Tunisian stock market, and the findings may not be generalizable to markets with different institutional structures and investor behaviors.Practical implicationsThe findings provide useful insights for investors and regulators seeking to better understand how belief heterogeneity and market frictions affect stock returns in emerging markets.Originality/valueThis study contributes to the literature by developing a novel measure of belief heterogeneity and by providing new empirical evidence on the joint role of mispricing and arbitrage constraints in an emerging market setting.

Keywords: Performance measurement; Asset pricing; Investor sentiment; Stock market (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rafpps:raf-02-2025-0062

DOI: 10.1108/RAF-02-2025-0062

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