Mispricing (the difference between prices and their underlying fundamental values) is an important characteristic of markets. The literature on the topic consists of many different measures. This state of affairs is unsatisfactory, since different measures may produce different results. Stöckl et al. (2010) partially address this problem by proposing (among other things) that measures of mispri...

We extend the theory of asymmetric information in mispricing models for stocks following geometric Brownian motion to constant relative risk averse investors. Mispricing follows a continuous mean–reverting Ornstein–Uhlenbeck process. Optimal portfolios and maximum expected log–linear utilities from terminal wealth for informed and uninformed investors are derived. We obtain analogous but more g...

This paper exploits a unique account-level dataset of structured funds to study how arbitrageurs trade during bubble periods (i.e., when large positive swings of mispricing occur in structured funds). I find that arbitrageurs can both ride bubbles during the bubble-formation periods and make arbitrage trades during the bubble-bursting periods. In particular, arbitrageurs ride bubbles more aggre...

This article examines arbitrage investment in a mispriced asset when the mispricing follows the Ornstein-Uhlenbeck process and a credit-constrained investor maximizes a generalization of the Kelly criterion. The optimal differentiable and threshold policies are derived. The optimal differentiable policy is linear with respect to mispricing and risk-free in the long run. The optimal threshold po...

In the framework of a reduced form asset pricing model featuring linear-in-z betas and risk premiums with lagged macro instruments, I propose a clean measure of mispricing that is free from the omitted-variable bias due to either missing priced factors or missing instruments. Applying the model to U.S. stock returns for 1927-2005, I find that momentum and contrarian strategies are related to th...

This study examines the impact of institutional investors' equity ownership stability and their investment horizon to determine on investee firms' mispricing. Mispricing represents difference between a firm’s market fundamental values. We treat investors as heterogenous group, i.e., dedicated, transient, or quasi-indexer defined by Bushee, 1998, 2001 since categorization determines trading stra...

We uncover two channels of effect in the financial market when investors face macroeconomic uncertainty. Conditional on a common mispricing index, we find that economic uncertainty exposure (EUE) induces disagreement, which amplifies mispricing. The highest EUE quintile produces an annualized alpha 9.96%, more than double unconditional effect. An ambiguity premium 3.84% is documented “non-mispr...