Global mispricing matters

Abstract

This paper constructs a global anomaly index based on the long-short portfolio returns of 153 anomalies across 33 stock markets. We find that global anomaly index is a strong negative predictor of aggregate stock returns in international markets, both in-sample and out-of-sample. The index delivers considerable economic value for a mean–variance investor. Moreover, it captures global common changes in overpricing, and is not subsumed by extant return predictors. Its predictive power arises from global asymmetric mispricing correction persistence, and partly from the ability to forecast sentiment-changes. Furthermore, we demonstrate significant transfer learning from the U.S. market to other markets in terms of time series predictions.