A0257
Title: Mispricing proxies in factor models for asset returns
Authors: ilaria leoni - Bocconi University (Italy)
Carlo A Favero - Bocconi University (Italy) [presenting]
Gabriele Confalonieri - Rationis (Italy)
Abstract: The aim is to examine the influence of mispricing proxies on stock return dynamics within the framework of Fama-French five-factor models. Specifically, the role of mispricing proxies derived from cointegration is assessed between asset prices and factor prices, as well as sentiment indicators extracted from quarterly earnings conference calls. Using quarterly data from 1980 to 2023 for the cross-section of DJIA-listed firms, the empirical analysis shows that deviations from long-run trends, driven by factor prices, have predictive power for stock returns after controlling for the five Fama-French factors. Stock-specific sentiment further enhances predictability. The additional predictability generated by mispricing proxies is fully explained by a non-linear model where sentiment determines the speed of adjustment toward the long-run trend identified by cointegration analysis when stock prices are above it.
