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[Lecture] Do Limits to Arbitrage Explain Portfolio Gains from Asset Mispricing?
Feb. 29, 2024
Speaker: Alberto Martin-Utrera (University of Notre Dame)

Time: 10:00—11:00 a.m., February 29, 2024, GMT+8

Venue:  Zoom:; ID: 872 7402 6064; PW: 948960


We study the efficiency gains from asset mispricing through the lenses of optimal portfolios. In particular, we decompose the optimal tangency portfolio into a systematic component that explains the time-series variation of stock returns and an unsystematic component that exploits asset mispricing. The unsystematic component offers considerable efficiency gains when combined with the systematic component. However, these gains only survive arbitrage constraints such as estimation risk, transaction costs, and short-sale constraints during high-sentiment periods. We capitalize on this finding to construct sentiment-based portfolios that better span the achievable efficient frontier than existing methods.

Source: School of Mathematical Sciences, PKU