Misvaluatoin & Behavioral Bias in the Danish Stock Market

Josefine Junker

Student thesis: Master thesis


The objective of this thesis is to investigate the prevalence of misvaluation and behavioral bias among Danish companies listed on Nasdaq OMX Copenhagen between 2005 and 2019 through Gokhale et al. (2015)’s financial market model with a composite error. Furthermore, the aim is to determine whether it is possible to obtain an abnormal return by investing in undervalued stocks. The empirical analysis is based on daily stock prices retrieved from Nasdaq OMC Copenhagen.
Firstly, the thesis examines different theoretical arguments regarding whether it is possible to outperform the market. For this purpose, Fama’s (1991) efficient market hypothesis has been included since he argues that the financial markets are efficient, thus it is not possible to outperform the market systematically. Behavioral Finance has been included as a counterargument to Fama, as Behavioral Finance theories suggest that misvaluation in the stock market indicates that markets are not efficient. On the one hand, Fama argues that rational investors will exploit arbitrage opportunities when they occur because of misvaluation which will push the stock prices towards its fundamental values. On the other hand, Behavioral Finance theory states that both the psychological aspect of an investors behavior and limits to arbitrage can result in significant and persistent misvaluation bias.
The analysis begins with a study of the prevalence of misvaluation and behavioral bias, which is conducted using Gokhale et al. (2015)’s financial market model with a composite error. The analysis is divided into two study populations. The first one considers the 20 most traded stocks in Denmark (OMXC20) and the second one considers a bigger sample of OMXC. The study discloses several significant undervalued stocks in both samples. Furthermore, the analysis examines whether it is possible to obtain an abnormal return by investing in stocks that are identified as undervalued at a 1%, 5% and 10% level of significance with a long-term in-vestment horizon (14 years). The results of the investment strategy are the same for both study populations since all three (six) portfolios outperform the market and earn high cumulative abnormal returns.
Lastly, the findings of the thesis are discussed in a theoretical perspective and speculations in the influence of erroneous assumptions and validity problems are made. The results of the thesis support the findings of Behavioral Finance-theorists. Furthermore, findings indicate the investment strategy cannot perform as well in a short-term investment horizon.
Overall, the thesis exhibits evidence of misvaluation and behavioral bias among Danish listed companies and the successful performance of investing in the significantly undervalued stocks.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2020
Number of pages78
SupervisorsSøren Plesner