Analyst Disagreement, Mispricing, and Liquidity*

Liquidity and hedging effectiveness under futures mispricing: international evidence

We analyze the hedging effectiveness of positions that replicate stock indexes using corresponding futures contracts through the application of a dynamic, stochastic hedging strategy proposed by Lafuente and Novales (2003). Conclusive gains do not emerge in any of the markets analyzed over the period considered, relative to the use of a constant unit hedge ratio. These findings are consistent w...

The Effect of Analyst Coverage on Corporate Voluntary Disclosure, Price Effi ciency and Liquidity

Systematic Mispricing

We provide statistical estimates of individual security mispricing which is defined as the departure of the market price from the prediction of a fundamental asset pricing model. We show that there is a return premium associated with systematic mispricing risk which is the dependence of the individual security mispricing on a market wide mispricing factor. The risk or characteristic-adjusted re...

How Important Is Mispricing?

Despite abundant evidence that firms’ characteristics predict their asset returns, we know little about how much firms’ asset prices deviate from their true values. Such mispricing could be distinct from observed return predictability if investors have biased beliefs that are not highly correlated with firms’ characteristics. We use a model to estimate the extent of information processing biase...

Funding Liquidity and Market Liquidity

Recent empirical studies have shown an increasing co-movement between fund and market liquidity, which is driven by common factors such as monetary shocks. Modeling this comovement becomes desirable to evaluate policies relating to liquidity and financial instability. This paper establishes a monetary model with capital to explain the dynamic interactions between funding and market liquidity in...