Abstract
The philosophy of relative valuation is rooted in the fact that the value of those firms
with the same fundamentals should converge eventually. Equipped with comprehensive data
sources, this paper empirically studies the relative valuation with a novel statistical factor
model in the global markets. The results show that: i) the model can persistently and steadily
capture the firm relative values over time and cross markets; and that ii) the profitability factor is usually compensated with the highest (positive) market pricing, apart from liquidity and momentum factors, whilst the size factor is negatively priced, no matter in emerging markets or developed markets. The deviation between the market relative value and the fair relative value represents the mispricing which can be used to predict future returns and generate investment strategies. The regression results show that the significant and positive risk premiums on the mispricing factor can be gained in 50% markets, including developed and emerging markets. Moreover, the dollar-neutral portfolio analysis shows that the mispricing portfolio produces the highest cumulative net asset value (NAV), leading to the overwhelming performance of a global mispricing portfolio against those risk portfolios formed on other relative factors. Compared with other mispricing measures, the relative mispricing factors have better performance.
with the same fundamentals should converge eventually. Equipped with comprehensive data
sources, this paper empirically studies the relative valuation with a novel statistical factor
model in the global markets. The results show that: i) the model can persistently and steadily
capture the firm relative values over time and cross markets; and that ii) the profitability factor is usually compensated with the highest (positive) market pricing, apart from liquidity and momentum factors, whilst the size factor is negatively priced, no matter in emerging markets or developed markets. The deviation between the market relative value and the fair relative value represents the mispricing which can be used to predict future returns and generate investment strategies. The regression results show that the significant and positive risk premiums on the mispricing factor can be gained in 50% markets, including developed and emerging markets. Moreover, the dollar-neutral portfolio analysis shows that the mispricing portfolio produces the highest cumulative net asset value (NAV), leading to the overwhelming performance of a global mispricing portfolio against those risk portfolios formed on other relative factors. Compared with other mispricing measures, the relative mispricing factors have better performance.
| Original language | English |
|---|---|
| Title of host publication | IFABS 2024 Shanghai Conference |
| Publication status | Published - Dec 2024 |