Pricing Without Mispricing

52 Pages Posted: 8 Jul 2021 Last revised: 6 May 2022

See all articles by Jianan Liu

Jianan Liu

Mingshi Investment Management; University of Hong Kong

Tobias J. Moskowitz

AQR Capital; Yale University, Yale SOM; National Bureau of Economic Research (NBER)

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Date Written: February 8, 2022

Abstract

We investigate whether various asset pricing models could hold in an efficient market. Assuming decade-old information should be priced correctly, we test whether a model assigns zero alpha to investment strategies that use only such information. The CAPM passes this test, but prominent multifactor models do not. Multifactor betas may help capture expected returns on mispriced stocks, but persistence in those betas distorts the stocks' implied expected returns after prices correct. Such effects are strongest in large-cap stocks, whose multifactor betas are the most persistent. Hence, prominent multifactor models distort expected returns, absent mispricing, for the largest, most liquid stocks.

Keywords: asset pricing, mispricing, market efficiency

JEL Classification: G12,G14,G40

Suggested Citation

Liu, Jianan and Moskowitz, Tobias J. and Moskowitz, Tobias J. and Stambaugh, Robert F., Pricing Without Mispricing (February 8, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3878375 or http://dx.doi.org/10.2139/ssrn.3878375

Jianan Liu

Mingshi Investment Management ( email )

8 Queens Road Central
Hong Kong Island
Hong Kong
Hong Kong

University of Hong Kong

Pokfulam Road
Hong Kong, Hong Kong
China

Tobias J. Moskowitz

AQR Capital ( email )

Greenwich, CT
United States

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert F. Stambaugh (Contact Author)

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
Philadelphia, PA 19104-6367
United States
215-898-5734 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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