Putting the Price in Asset Pricing

Journal of Finance forthcoming

101 Pages Posted: 28 Dec 2019 Last revised: 19 Dec 2023

See all articles by Thummim Cho

Thummim Cho

Korea University Business School

Christopher Polk

London School of Economics

Date Written: December 14, 2023

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 CAPM, finding that a single characteristic dubbed adjusted value provides a parsimonious model of CAPM-implied abnormal price.

Keywords: price level, long-horizon returns, mispricing metric, stochastic discount factor, CAPM

JEL Classification: G12, G14, G32

Suggested Citation

Cho, Thummim and Polk, Christopher, Putting the Price in Asset Pricing (December 14, 2023). Journal of Finance forthcoming, Available at SSRN: https://ssrn.com/abstract=3499681 or http://dx.doi.org/10.2139/ssrn.3499681

Thummim Cho (Contact Author)

Korea University Business School ( email )

Seoul
Korea, Republic of (South Korea)

Christopher Polk

London School of Economics ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/polk/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
656
Abstract Views
2,585
Rank
74,077
PlumX Metrics