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Mispricing in the odd lots market in Brazil

Author

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  • Ramos, Henrique P.
  • Perlin, Marcelo S.
  • Righi, Marcelo B.

Abstract

We study the case of mispricing in the odd lots equity market in Brazil. Contrary to expectation, odd lot investors are paying higher prices than round lot investors. The pricing difference between markets is affected by market returns, volatility and spreads. Our main hypothesis is that; once the assets traded in the odd lot market are more illiquid than their counterparts, the mispricing is driven by liquidity factors. Additionally, we show that the mispricing yields an arbitrage opportunity that is not being traded away in the Brazilian market. Therefore, we propose regulators to review the market design for odd lots in Brazil. We argue that reducing the minimal trading unit in the round lots market would benefit investors.

Suggested Citation

  • Ramos, Henrique P. & Perlin, Marcelo S. & Righi, Marcelo B., 2017. "Mispricing in the odd lots market in Brazil," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 618-628.
    • Handle: RePEc:eee:ecofin:v:42:y:2017:i:c:p:618-628
    DOI: 10.1016/j.najef.2017.09.004
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    Cited by:

    1. Ramos, Henrique Pinto & Perlin, Marcelo Scherer, 2020. "Does algorithmic trading harm liquidity? Evidence from Brazil," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Odd lots; Market microstructure; Liquidity; BM&FBovespa;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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