DP14232 Global Market Inefficiencies

Author(s): Söhnke M Bartram, Mark Grinblatt
Publication Date: December 2019
Keyword(s): Asset Pricing, fundamental analysis, instrumented principal components analy-sis (IPCA), international finance, Market Efficiency, Point-in-Time (PIT), principal components, transaction costs, Valuation
JEL(s): G11, G14, G15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14232

Using point-in-time accounting data, we estimate monthly fair values of 25,000+ stocks from 36 countries. A trading strategy based on deviations from fair value earns significant risk-adjusted returns ("alpha") in most regions, especially the Asia Pacific, that are unrelated to known anomalies. The strategy's 40â??70 basis point per month alpha difference between emerging and developed markets contrast with prior research findings. A country's pre-transaction-cost alpha is positively related to its trading costs, but exceeds country-specific institutional trading costs. Thus, global equity markets are inefficient, particularly in countries with quantifiable market frictions, like trading costs, that deter arbitrageurs.