Abstract

Mispricing in the Equity Market: Applied to Saudi Stock Market
Adnan F. Abo Al Haija*
Abstract
This paper intends to examine whether the Saudi equity market exhibit some kind of mispricing during the years 2013 and 2014, and to study the effect of fundamental and non-fundamental key factors on relative mispricing within a comparative and dynamic context. Mispricing is defined as the deviation of market stock prices from intrinsic values, expressed in a ratio form. The stock’s intrinsic value is estimated using the residual income model in two methods; the traditional Ohlson (1995) model and the regression method. It is found that the Saudi stock exchange is characterized by the presence of persistent overpricing over recent years, and that firm’s abnormal earnings per share and stocks’ turnover play a positive role in keeping market prices in line with their fundamental values. Moreover, it was found that the initial mispricing spread is negatively related with its subsequent dynamic change; which means that stocks which are initially overpriced will exhibit in the next period a movement towards underpricing, a sign of convergence.
The major limitation of this study is the lack of sufficient and consistent data for longer periods.
Key words: mispricing spread, intrinsic value, abnormal earnings, stock market, Saudi Arabia.
* Associate professor at the Finance Department in the College of Business, Alfaisal University. Correspondence: College of Business- Alfaisal University, P.O.Box 50927, Takhasusi Road, Riyadh 11533, Saudi Arabia

Year of Publication
2019

Mispricing in the Equity Market: Applied to Saudi Stock Market

15-04-2019

Associate Professor of Finance

Citation: Mispricing in the Equity Market: Applied to Saudi Stock Market. 2019.

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Published by: , 2019

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