Dynamic Asset (Mis)Pricing: Build-up vs. Resolution Anomalies

Abstract

We classify asset pricing anomalies into those that exacerbate existing mispricing (build-up anomalies) and those that resolve it (resolution anomalies). To this end, we compute the dynamics of price wedges for a large number of well-known asset pricing anomalies (the factor zoo). We find that several prominent anomalies like momentum and profitability push prices even further away from fundamental value. Generally, this mispricing build-up is faster than the subsequent resolution, suggesting the potential for material real economics consequences. Our results suggest that financial intermediaries chasing build-up anomalies in fact negatively affect price efficiency and associated real capital allocation.

Keywords: Dynamic Price Wedges, Build-up, Resolution, Persistence, Real Anomalies

JEL Classification: G11, G12, G14