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Mispricing and Uncertainty in International Markets

Author

Listed:
  • Mirela Sandulescu

    (University of Michigan, Ross School of Business)

  • Paul Schneider

    (University of Lugano - Institute of Finance; Swiss Finance Institute)

Abstract

We develop Residual MisPricing (RMP), an index capturing mispricing relative to a linear benchmark asset pricing model, from the structure imposed by no-arbitrage. RMP is fully conditional and depends only on the returns of basic assets. Return data for several economies reveal that RMP is countercyclical and related to financial uncertainty. RMP further shows a strong positive relation to conditional international equity and currency risk premia, as well as a close link to market-wide funding liquidity shocks. The relations we document hold in particular out-of-sample. Our evidence points to new record highs for RMP during the COVID-19 era, similar to its behavior in the 2008 financial crisis.

Suggested Citation

  • Mirela Sandulescu & Paul Schneider, 2021. "Mispricing and Uncertainty in International Markets," Swiss Finance Institute Research Paper Series 21-14, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2114
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    More about this item

    Keywords

    stochastic discount factor; residual mispricing; financial uncertainty; exchange rates; machine learning;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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