Putting the price in asset pricing

Thummim Cho and Christopher Polk

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We propose a novel way to estimate a portfolio's abnormal price, the percentage gap between price and the present value of dividends computed with a chosen asset pricing model. Our method, based on a novel identity, resembles the time-series estimator of abnormal returns, avoids the issues in alternative approaches, and clarifies the role of risk and mispricing in long-horizon returns. We apply our techniques to study the cross-section of price levels relative to the capital asset pricing model (CAPM) and find that a single characteristic, adjusted value, provides a parsimonious model of CAPM-implied abnormal price.

Keywords: price level; mispricing metric; novel identity; stochastic discount factor; CAPM (search for similar items in EconPapers)
JEL-codes: G12 G14 G32 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2024-12-31
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Published in Journal of Finance, 31, December, 2024, 79(6), pp. 3943 - 3984. ISSN: 0022-1082

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http://eprints.lse.ac.uk/120805/ Open access version. (application/pdf)

Related works:
Journal Article: Putting the Price in Asset Pricing (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:120805

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