Valuation Bias and Profit Opportunities in Financial Markets

Jayendra Gokhale, Elizabeth Schroeder, Victor J. Tremblay


Recent work by Gokhale et al. (forthcoming) proposes a method for detecting misvalued stocks. This paper applies the method to look for profitable investment opportunities by identifying undervalued stocks. Using data on companies in the S&P 100 over a period of 22 years, we test several specifications of our investment strategy for robustness. We find that investing in undervalued stocks significantly outperforms benchmark indices over time, and that this strategy can lead to risk-adjusted excess returns that are positive and statistically significant.

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International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

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