Random Pricing Errors and Systematic Returns: Is There a Frequentist Flaw in Market Prices?

35 Pages Posted: 11 Jun 2015 Last revised: 16 Mar 2017

Tarek Eldin

Geode Capital Management

Date Written: March 16, 2017

Abstract

This paper examines the consequences of widespread and significant pricing errors. If market valuations differ from intrinsic value but are unbiased estimates of it, certain systematic mispricing patterns will arise. To remove these phenomena, market prices need to adjust away from unbiased estimates of firm value. Using Bayesian concepts, this paper derives the properties of the resulting adjusted prices. Whether this outcome is achieved, however, is unclear. A number of well-known empirical phenomena are in line with the view that there are material pricing errors and historically, price adjustments have been incomplete.

Keywords: Pricing Errors, Factor Returns

JEL Classification: G1, G12, G14

Suggested Citation

Eldin, Tarek, Random Pricing Errors and Systematic Returns: Is There a Frequentist Flaw in Market Prices? (March 16, 2017). Available at SSRN: https://ssrn.com/abstract=2616930 or http://dx.doi.org/10.2139/ssrn.2616930

Tarek Eldin (Contact Author)

Geode Capital Management ( email )

One Post Office Square
20th floor
Boston, MA 02109
United States

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