1. Global Market Inefficiencies
Söhnke M. Bartram
Mark Grinblatt

2. Profits from Fundamental Analysis: Used to Assess Relative Efficiency
Strategy Based on Fundamental Analysis
Profits from
Buying Undervalued Stocks
Selling Overvalued Stocks
Deviations of Market Prices from Fair Value
More Likely to Converge than Diverge
Fair Value Estimation Requirement
Problem: How to Do It
Research Problem: Data Snooping
Bartram and Grinblatt (April 2018, JFE)
Agnostic mispricing signal: Linear f(Accounting)

3. Fair Value Estimation Within Country Peer Implied Valuation Regression
Market capitalization on accounting values and intercept
Residual as a percent of market cap is mispricing
Market portfolio is fairly valued by construction
Market capitalization on accounting values without intercept
Firms with accounting values of zero have no value
Results independent of scale (per share, % of assets)
Market capitalization on earnings forecast for FY1 and FY2
Two Econometric Approaches
Ordinary Least Squares (OLS)
Theil(1950)-Sen(1968) (TS)
Ohlson and Kim (2015) argue that TS estimation is superior to OLS for linear valuation models

4. Testing Efficiency with Trading Profits: Regressions Globally and By Regions
Cross sectional Fama-MacBeth regressions of firm’s returns on mispricing quinitle dummies (Q5=underpriced, Q1=overpriced)
Controls for usual suspects: beta, size, book/market, past returns (short, medium, long), accruals, SUE, gross profitability, earnings yield, industry, country fixed effects
Factor model alphas: quintile-sorted mispricing portfolios
80-factor model from our stocks
44-factor model from everything in French Data Library
Tests between Emerging and Developed Markets
Effect of a Delayed Signal
Profits net of transaction costs/Buy-and-Hold strategy
Profits within quintiles of 20 other anomalies
Testing whether frictions predict trading profits

5. Sample and Data Sample DataStream WorldScope PIT Fundamentals
25,731 non-financial firms from 36 countries
4/ /2016
DataStream
Returns and market capitalization
WorldScope PIT Fundamentals
Balance sheet, income statement and cash flow statement
French Data Library
U.S. and international factors (global 44-factor model)
Elkins McSherry
Fees, commissions, and market impact
Country attributes from assorted sources

6. Sample By Country

7. Sample by Region Regions World, World (ex U.S.)
Geographic: Asia Pacific, Europe, Americas, U.S., Japan
Emerging, Developed, Developed (ex. U.S.)

8. Selected Summary Statistics
These figures are large because extreme conditional means sort on sampling error and are therefore biased. However, since much of our later analysis involves ranks, there is little need to adjust for the bias with statistical corrections like Bayesian shrinkage.
By construction, the date t market-cap-weighted average of Mj(t) is zero.

9. Q5-Q1 Monthly Return Spreads

10. Fama-MacBeth Regression Coeffs: World (non-Q5 regressors hidden)

11. Fama-MacBeth Regression: Q5 dummy coefficient by region

12. Emerging vs Developed Fama-MacBeth Regression (most coefficients hidden)

13. Monthly 80-Factor Alpha Spreads

14. EW 80-Factor Model Intercepts: Alphas Across Quintiles and Regions

15. Delay and Signal Efficacy

16. Turnover and Transactions Costs

17. Transaction Costs and Frictions: Firm-Level Fama MacBeth Regressions

18. Controlling For Other Anomalies

19. Signals Without Intercept

20. Signals With Earnings Forecasts
For firms that have data on both types of signals, the alpha spreads are about same as those deriving from the accounting variables alone

21. Summary and Conclusion
Study Equity Market Efficiency Internationally
Mispricing predicts risk-adjusted returns around the world
Inefficiencies are larger in
Asia Pacific (including Japan)
Emerging markets compared to developed markets
Positive relation of gross alpha and transactions costs
Alpha from mispricing in hypothetical country with zero trading costs is zero
Trading profits exist after transactions costs
Reducing turnover increases net profits in emerging markets
Other costs (e.g. compliance) or opportunity costs of organizational effort and capital deter arbitrageurs
information acquisition/processing, legal compliance