Asset Pricing with Price Levels

68 Pages Posted: 28 Dec 2019 Last revised: 7 May 2020

See all articles by Thummim Cho

Thummim Cho

London School of Economics & Political Science (LSE) - Department of Finance

Christopher Polk

London School of Economics

Date Written: November 18, 2019


We propose a novel way to study asset prices based on asset price distortions rather than abnormal returns. Our theoretical contribution is the new exact identity that expresses ex-ante price distortion in terms of subsequent abnormal returns. Unlike existing measures, our identity correctly reflects that not only the magnitude but also the time and state in which abnormal returns occur matter for ex-ante mispricing. Our identity also implies a simple measure of price level that summarizes the entire term structure of discount rates and a price-level regression that appropriately generalizes the conventional return regression to long horizons. Empirically, our price-level regressions reveal three important facts about price levels of stocks: (1) The CAPM does a relatively good job describing the cross-section of average price levels, despite its poor ability to explain short-horizon returns. (2) Positive (negative) short-horizon abnormal returns do tend to imply underpricing (overpricing), but momentum is an important exception. (3) Portfolios sorted on investment, beta, net equity issuance, and the interaction of value and quality are important price-level anomalies that both long-term buy-and-hold investors and researchers disciplining models from the price-level perspective should prioritize.

Keywords: price level, long-horizon returns, mispricing metric, stochastic discount factor, CAPM

JEL Classification: G12, G14, G32

Suggested Citation

Cho, Thummim and Polk, Christopher, Asset Pricing with Price Levels (November 18, 2019). Available at SSRN: or

Thummim Cho (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Christopher Polk

London School of Economics ( email )

United Kingdom


Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics