Two essays on market efficiency: Tests of idiosyncratic risk: informed trading versus noise and arbitrage risk, and agency costs and the underlying causes of mispricing: information asymmetry versus conflict of interests
Degree Granting Department
Christos Pantzalis, Ph.D.
Idiosyncratic volatility, Market efficiency, Noise trading, Arbitrage risk, Equity mispricing, Agency costs
I examine the informational efficiency of stock markets by testing the relation between idiosyncratic volatility and equity mispricing. I find that the level of mispricing declines with idiosyncratic volatility consistent with the notion that greater levels of firm-specific risk reflect greater participation of informed traders in the market for the stock. However, I also find that mispricing increases with idiosyncratic volatility for highly volatile stocks, and this is attributed to both noise trading and arbitrage risk. In addition, I investigate the link between agency costs and equity mispricing, and whether it exists due to information asymmetry or the degree of conflict of interests between managers and shareholders. I provide evidence that the level of agency costs is positively related with mispricing. In contrast to previous studies' claim that the information asymmetry level is a key determinant in the equity mispricing, I find that the conflict of interests is more important than information asymmetry in explaining equity mispricing. Furthermore, the evidence suggests that stock option grants, originally intended to resolve conflicts of interests, actually exaggerate this problem.
Scholar Commons Citation
Park, Jung Chul, "Two essays on market efficiency: Tests of idiosyncratic risk: informed trading versus noise and arbitrage risk, and agency costs and the underlying causes of mispricing: information asymmetry versus conflict of interests" (2007). Graduate Theses and Dissertations.