Pricing Without Mispricing

Jianan Liu, Tobias J. Moskowitz and Robert F. Stambaugh

No 29016, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate whether various asset pricing models could hold in an efficient market. Assuming decade-old information should be priced correctly, we test whether a model assigns zero alpha to investment strategies that use only such information. The CAPM passes this test, but prominent multifactor models do not. Multifactor betas may help capture expected returns on mispriced stocks, but persistence in those betas distorts the stocks' implied expected returns after prices correct. Such effects are strongest in large-cap stocks, whose multifactor betas are the most persistent. Hence, prominent multifactor models distort expected returns, absent mispricing, for the largest, most liquid stocks.

JEL-codes: G12 G14 G40 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-fmk
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