Dynamic Asset (Mis)Pricing: Build-up vs. Resolution Anomalies
63 Pages Posted: 18 Feb 2021
Date Written: February 12, 2021
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
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