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Mispricing: failure to capture the risk preferences dependent on market states

Author

Listed:
  • Hongwei Xing

    (Shanxi University)

  • Hanying Wang

    (Shanxi University of Finance and Economics)

  • Feiyang Cheng

    (Tianjin University)

  • Shouyu Yao

    (Tianjin University
    Macquarie University)

Abstract

This paper explores the mispricing relative to the capital asset pricing model through an equilibrium model. We find that both the strong risk preference dependent on good market states and strong risk aversion dependent on bad market states can produce high mispricing. Choosing the China stock market, the largest emerging market dominated by individual investors and known for its volatile nature in a short history as our sample, the empirical results also support our theoretical findings. Overall, our paper sheds light on the mispricing caused by the investor’s risk preference reference-dependent on market states.

Suggested Citation

  • Hongwei Xing & Hanying Wang & Feiyang Cheng & Shouyu Yao, 2023. "Mispricing: failure to capture the risk preferences dependent on market states," Annals of Operations Research, Springer, vol. 330(1), pages 1-26, November.
    • Handle: RePEc:spr:annopr:v:330:y:2023:i:1:d:10.1007_s10479-021-04166-1
    DOI: 10.1007/s10479-021-04166-1
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    More about this item

    Keywords

    Mispricing; Risk preference; Reference point; Market state;
    All these keywords.

    JEL classification:

    • 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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