Bridge over ocean
1 November 1999 Financial Analysts Journal Volume 55, Issue 6

Equity Mispricing: It's Mostly on the Short Side

  1. Mark T. Finn
  2. Russell J. Fuller
  3. John L. Kling

In the large-cap sector of the U.S. equity market, the degree of mispricing is much greater for stocks one would like to sell short than for stocks one would like to buy long. For example, if no attempt is made to control tracking error, large-cap short/sell candidates tend to be overpriced by as much as four times the amount the large-cap long/purchase candidates are underpriced. With respect to tracking error, we found that controlling for firm size, even in the large-cap sample of stocks we examined, significantly reduces tracking error. Controlling for value versus growth also reduces tracking error. Once one controls for value versus growth and firm size, controlling for economic sector has relatively little effect on tracking error.

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