Mispricing: failure to capture the risk preferences dependent on market states

Hongwei Xing, Hanying Wang, Feiyang Cheng and Shouyu Yao ()
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Hongwei Xing: Shanxi University
Hanying Wang: Shanxi University of Finance and Economics
Feiyang Cheng: Tianjin University
Shouyu Yao: Tianjin University

Annals of Operations Research, 2023, vol. 330, issue 1, No 26, 26 pages

Abstract: Abstract This paper explores the mispricing relative to the capital asset pricing model through an equilibrium model. We find that both the strong risk preference dependent on good market states and strong risk aversion dependent on bad market states can produce high mispricing. Choosing the China stock market, the largest emerging market dominated by individual investors and known for its volatile nature in a short history as our sample, the empirical results also support our theoretical findings. Overall, our paper sheds light on the mispricing caused by the investor’s risk preference reference-dependent on market states.

Keywords: Mispricing; Risk preference; Reference point; Market state (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10479-021-04166-1

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