Working Paper: CEPR ID: DP14232
Authors: Shnke Bartram; Mark Grinblatt
Abstract: 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 40–70 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.
Keywords: International Finance; Valuation; Asset Pricing; Market Efficiency; Fundamental Analysis; Point-in-Time; Transaction Costs; Principal Components; Instrumented Principal Components Analysis
JEL Codes: G11; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deviations from fair value (G19) | risk-adjusted returns (alpha) (G11) |
| trading strategies based on deviations (F14) | risk-adjusted returns (alpha) (G11) |
| trading costs (F12) | alpha from mispricing (G19) |
| pre-transaction cost alpha (G19) | trading costs (F12) |
| global equity markets inefficiency (G14) | market frictions (D43) |
| trading strategies based on mispricing signals (G14) | risk-adjusted profits (G22) |