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Extrapolation beyond peers: An asset pricing perspective

Author

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  • Tang, Guohao
  • Wu, Yiyong
  • Lou, Guanyu

Abstract

We introduce a novel measure that captures the beta deviation of individual firms from their industry peers within China's stock market. Our analysis reveals that stocks with greater beta deviation generate significantly higher future returns. This predictive power is unaffected by established return predictors and remains robust across alternative peer identification methods, beta estimation techniques, and subsample tests. Our findings suggest a behavioral interpretation, linking positive predictability to mispricing driven by investors' extrapolation biases. Overall, our research highlights the critical role of incorporating peer firms into asset pricing, particularly in emerging markets.

Suggested Citation

  • Tang, Guohao & Wu, Yiyong & Lou, Guanyu, 2024. "Extrapolation beyond peers: An asset pricing perspective," Journal of International Money and Finance, Elsevier, vol. 148(C).
    • Handle: RePEc:eee:jimfin:v:148:y:2024:i:c:s0261560624001402
    DOI: 10.1016/j.jimonfin.2024.103153
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    More about this item

    Keywords

    Peer firm; Market beta; Industry peers; Extrapolative expectation;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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