The Effect of the Mispricing on Stock Returns: An Application of the Five-Factor Model

Document Type : Original Article

Authors

1 Assistant Prof, Department of Economics, Yazd University, Yazd, Iran.

2 Assistant Prof, Department of Management, Kashan University, Isfahan, Iran

3 MSc. In Economics, Yazd University, Yazd, Iran.

Abstract

     A safe investment for an investor depends on knowing if the price increase is real or the mispricing is causing the price to rise. In order to examine the role and effect of the mispricing on the return on stocks of monthly data, a sample of 276 companies from the Tehran Stock Exchange has been used for two periods of Boom and Substantiv in a five-factor model. Analysis of the analytical model shows that mispricing of stocks during the boom period in all portfolios has a positive and significant effect on stock returns, but during the recession, only five portfolios had a positive and significant effect. These results mean that in the recession period, incorrect valuation of stocks is not associated with higher returns on the relevant share, but this relationship is strengthened during the boom period. Also, the factor of market risk in the recession period in large portfolios is positive and significant, but in the boom period in large portfolios it is significant but does not show a fixed sign. The size factor has a negative and significant relationship with stock returns both in the boom period and in the recession period in large portfolios. In addition, the value factor in the recession period in large portfolios is a positive and significant value, but in the boom period it is only positive and significant in large portfolios. The momentum factor is significant in the recession period in large and valuable portfolios, but does not show a fixed sign in both periods. This factor is significant in the boom period in large portfolios.

Keywords

References

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Financial Management Perspective
Volume 9, Issue 28 - Serial Number 28
December 2019
Pages 117-142

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