Putting the Price in Asset Pricing
Journal of Finance forthcoming
101 Pages Posted: 28 Dec 2019 Last revised: 19 Dec 2023
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: Suggested Citation