19 Pages Posted: 13 Jul 2014
Date Written: July 12, 2014
α (“Alpha”) has symbolic importance on the investments side of finance. That is, a fundamental pillar of modern finance theory is the risk-return relation, and traditionally alpha is taken to represent the degree of “mispricing” in asset returns. But, such an interpretation is not always appropriate – seemingly paradoxically, for certain specific setups alpha embodies pricing information. In this paper, I explain and illustrate the distinguishing circumstances between these two diametrically opposed cases.
Keywords: Alpha; Beta; Empirical asset pricing; Mispricing information; Pricing information
JEL Classification: G12
Suggested Citation: Suggested Citation