Geographic Heterogeneity, Local Sentiment, and Market Anomalies

Abstract

This study shows that market anomalies are stronger for stocks of firms headquartered in states with a history of better anomaly performance. Using a combined measure of mispricing based on 11 prominent anomaly strategies, I find that the level of mispricing for a firm's geographic peers predicts how mispriced the firm's stock will be in the future. I find similar results when I consider industry peers instead, but neither group absorbs the effect of the other. States in which mispricing is more prevalent are those experiencing relatively higher levels of local investor sentiment and better local macroeconomic conditions.

Keywords: Anomalies, Local predictability, Mispricing, Sentiment, Peer effects

JEL Classification: G12, G14