Real Anomalies

Abstract

We examine the importance of asset pricing anomalies (alphas) for the real economy. We develop a novel quantitative model with lumpy investment that features such informational inefficiencies and yields closed-form solutions for cross-sectional distributions of firm dynamics. Our findings indicate that anomalies can cause material real inefficiencies, raising the possibility that agents that help eliminate them can provide significant value added to the economy. The framework reveals that alphas alone are poor indicators of real distortions, and that efficiency losses depend on the persistence of alphas, the amount of mispriced capital, and the Tobin's q of firms affected.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.