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Characteristics of pricing errors in stocks implied by autocovariance and drag

Tijdschriftbijdrage - Tijdschriftartikel

© 2014 Taylor & Francis. In this article, we estimate the lower bounds on the volatility and autocorrelation of pricing errors in stocks and infer the market-wide component in the pricing errors, by combining information from the autocovariance and ‘drag’ in stock returns. For the smaller US stocks, we estimate lower bounds of 8−10% for the volatility and 0.3−0.5 for the autocorrelation of the pricing errors, at monthly horizon. We infer that approximately 50% of the pricing errors of the smaller stocks originate from the market-wide component, whereas for larger stocks, virtually all of the pricing errors are market-wide. In practice, this evidence means that market-wide bubbles and busts are far more important than idiosyncratic sources of pricing errors, like thin trading, low liquidity or little analyst following.
Tijdschrift: Applied Economics Letters
ISSN: 1350-4851
Issue: 12
Volume: 22
Pagina's: 999 - 1004
Jaar van publicatie:2015
BOF-keylabel:ja
IOF-keylabel:ja
BOF-publication weight:0.1
CSS-citation score:1
Authors from:Higher Education