Dynamic Asset (Mis)Pricing: Build-up vs. Resolution Anomalies
90 Pages Posted: 18 Feb 2021 Last revised: 13 May 2022
Date Written: February 12, 2021
We classify asset pricing anomalies into those exacerbating mispricing (build-up anomalies) and those resolving it (resolution anomalies). To this end, we estimate the dynamics of price wedges for well-known anomaly portfolios in the factor zoo and map them to firm-level mispricings. We find that several prominent anomalies like momentum and profitability further dislocate prices. Moreover, our estimates yield a novel decomposition of Tobin's q, revealing that q's mispricing component has roughly equal explanatory power for firm investment as its informationally efficient counterpart. Our results suggest that financial intermediaries chasing build-up anomalies negatively affect price efficiency and associated real capital allocation.
Keywords: Dynamic Price Wedges, Alphas, Persistence, Real Misallocation
JEL Classification: G11, G12, G14
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