Dynamic Asset (Mis)Pricing: Build-up vs. Resolution Anomalies
44 Pages Posted: 18 Feb 2021 Last revised: 21 Nov 2022
Date Written: February 12, 2021
We classify asset pricing anomalies into those exacerbating mispricing (build-up anomalies) and those resolving it (resolution anomalies). We estimate the dynamics of price wedges for well-known anomaly portfolios and map them to ﬁrm-level mispricings. We find that several prominent anomalies like momentum and profitability further dislocate prices. Multi-factor models designed to eliminate one-month alphas still produce large price wedges. Our estimates yield a novel decomposition of Tobin’s q, revealing that q's mispricing component has substantial explanatory power for ﬁrm investment. Overall, our results suggest that financial intermediaries chasing build-up anomalies negatively affect price efficiency and associated real capital allocation.
Keywords: Mispricing, Price Wedges, Tobin’s q, Real Misallocation
JEL Classification: G02, G11, G12, G14, E22
Suggested Citation: Suggested Citation