RIM-based Value Premium and Factor Pricing Using Value-Price Divergence

72 Pages Posted: 1 Mar 2017 Last revised: 10 Jan 2023

See all articles by Lin William Cong

Lin William Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Nathan George

University of California, Berkeley - Fisher Center for Real Estate and Urban Economics

Guojun Wang

Tongji University

Date Written: April 24, 2018

Abstract

Value-to-Price, the ratio of Residual-Income-Model-based valuation to market price, subsumes the power of book-to-market and to a large extent of various quality measures in predicting stock returns. A natural hedge against momentum, long-short Value-to-Price strategies resuscitate the value premium and generate significant returns even after adjusting for common factors. The value-price-divergence (VPD) factor, constructed from the average returns of the long-short Value-to-Price portfolios within small and big stocks, is not spanned by known factor models. Max-Sharpe-ratio and constrained R-squared tests reveal that factor models replacing the traditional value factor with the VPD factor better explain the cross-section of expected equity returns.

Keywords: Asset Pricing, Factor Models, Mispricing, RIM, Value Premium.

Suggested Citation

Cong, Lin and George, Nathan and Wang, Guojun, RIM-based Value Premium and Factor Pricing Using Value-Price Divergence (April 24, 2018). Available at SSRN: https://ssrn.com/abstract=2925577 or http://dx.doi.org/10.2139/ssrn.2925577

Lin Cong (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.linwilliamcong.com/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nathan George

University of California, Berkeley - Fisher Center for Real Estate and Urban Economics ( email )

Haas School of Business
Berkeley, CA 94720-1900
United States

Guojun Wang

Tongji University ( email )

School of Economics and Management
1239 Siping Rd
Shanghai
China

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