CAN STOCK MARKET MISPRICING OR THE PRESENCE OF STOCK PRICE BUBBLE BE ANTICIPATED USING FUNDAMENTAL ANALYSIS? AN EVIDENCE FROM DEVELOPING ECONOMIES

Abstract

The scarcity of resources is not a new phenomenon and financial resources are further inadequate.  Regardless of this fact stock market mispricing and bubbles are a continuing phenomenon. These have far-reaching consequences which penetrate deep and wide in the market causing loss of wealth to the investors. It has been surfaced that even efficiently working stock exchanges have went through this tragic event of bubble burst. Estimation of stock price returns to test the presence of abnormal hike is the crucial need of time. The correction of the mispricing of stocks cost a lot of money, from investors pocket and sometime result in public lending and government bailout. A sample of countries with the history of stock market mispricing, including Pakistan, China, India, Bangladesh, Turkey, Malaysia, Thailand, and Qatar, were selected for the analysis. Stock market data set from 1980 to 2020 was collected for this purpose. It has been observed that the stock price is comprised of two factors the rational (fundamental) and irrational factors. This study has used the ARDL approach to test the impact of fundamental factors on price. Nevertheless its effect on prices has been demonstrated to be inferior as compared to irrational factors such as herding behavior and noise trader effect. However, it is implied that fundamental analysis is eminent in the course of stock price estimation. The results of this study aims to aid the portfolio managers for better investment alternatives selection.