A Mispricing Factor, IPCA and China A-Shares Market

Event Date: 9 November 2022

Speaker: Professor Zhenya Lui (Renmin Uinversity of China)

Time: 2pm

Abstract:

This paper has identified four significant characteristics related to mispricing in China's A-shares market using the instrumented principal component analysis (IPCA): idiosyncratic volatility, bid-ask spread, short-term reversal, and turnover. Based on these four characteristics, we build a factor with a Sharpe ratio of 1.81 that measures the mispricing effect. We propose a four-factor model including the market, size, profitability, and our mispricing factors. In addition to explaining 36 anomaly portfolios in the literature more effectively, it also outperforms the majority of asset pricing factor models currently in use. The tangency portfolio of these four factors achieves an out-of-sample Sharpe ratio of 2.42. 

Published: 8 November 2022