Does uncertainty affect the limits of arbitrage? Evidence from the US stock markets

Chen, Weihua1,7; Mamon, Rogemar2,4; Xiong, Heng1,5,6; Zeng, Pingping3

2024-09-01

10.1016/j.najef.2024.102221

NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE   影响因子和分区

1062-9408

1879-0860

This study analyzes how uncertainty affects the correction process of mispricing. We extract stock market data from the United States spanning from January 1976 to December 2016, and discover that uncertainty exerts a notable impact on traders' decision-making processes. Various robustness tests have been conducted to validate the credibility of our findings. Notably, the extension of the sample duration until December 2022, encompassing the disruptive COVID19 pandemic, serves to fortify the cohesion and reliability of our primary analysis, with the findings exhibiting consistency. Additionally, we examine how investor sentiment affects future returns under different uncertainty and overpricing ranks. An inverse relation between investor sentiment and uncertainty is also detected. We contribute to the existing literature by revealing potential features that affect the limits of arbitrage. Our results provide insights in designing arbitrage mechanisms and assist arbitrageurs in strategizing their operations with stocks under different magnitudes of uncertainty.

Uncertainty Uncertainty Mispricing Arbitrage process Trader risk Investor sentiment

SSCI

英语

其他

Foreign Young Talents Program of the Ministry of Science and Technology of China[QN2023153001L] ; Humanities and Social Science Fund of Ministry of Education of China[23YJCZH001]

Business & Economics

Business, Finance ; Economics

WOS:001266428900001

ELSEVIER SCIENCE INC

Web of Science

1.Wuhan Univ, Econ & Management Sch, Luojia Hill, Wuhan 430072, Peoples R China
2.Univ Western Ontario, Dept Stat & Actuarial Sci, London, ON, Canada
3.Southern Univ Sci & Technol, Dept Math, Shenzhen, Peoples R China
4.Univ Philippines Visayas, Div Phys Sci & Math, Iloilo, Philippines
5.Wuhan Univ, Ningbo, Peoples R China
6.Ningbo Natl Inst Insurance Dev NIID, Ningbo, Peoples R China
7.China Unionpay, Shanghai, Peoples R China

Chen, Weihua,Mamon, Rogemar,Xiong, Heng,et al. Does uncertainty affect the limits of arbitrage? Evidence from the US stock markets[J]. NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE,2024,74.

Chen, Weihua,Mamon, Rogemar,Xiong, Heng,&Zeng, Pingping.(2024).Does uncertainty affect the limits of arbitrage? Evidence from the US stock markets.NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE,74.

Chen, Weihua,et al."Does uncertainty affect the limits of arbitrage? Evidence from the US stock markets".NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE 74(2024).