Journal of Finance, August 2019
Jacobs Levy Equity Management Center for Quantitative Financial Research Paper
74 Pages Posted: 16 Mar 2016 Last revised: 11 Aug 2020
There are 2 versions of this paper
We examine the importance of cross-sectional asset pricing anomalies (alphas) for the real economy. We develop a novel quantitative model of the cross-section of firms that features lumpy investment and informational inefficiencies, while yielding distributions in closed form. Our findings indicate that anomalies can cause material real inefficiencies, raising the possibility that agents that help to eliminate them add significant value to the economy. The framework reveals that the magnitude of alphas alone is a poor indicator of real implications, and highlights the importance of alpha persistence, the amount of mispriced capital, and the Tobin's q of firms affected.
Keywords: Real Misallocations, Asset Pricing Anomalies, Alpha, Lumpy Investment
JEL Classification: D22, D24, D53, D92, E22, G2, G30
Suggested Citation: Suggested Citation