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Putting the price in asset pricing

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  • Cho, Thummim
  • Polk, Christopher

Abstract

We propose a novel way to estimate a portfolio's abnormal price, the percentage gap between price and the present value of dividends computed with a chosen asset pricing model. Our method, based on a novel identity, resembles the time-series estimator of abnormal returns, avoids the issues in alternative approaches, and clarifies the role of risk and mispricing in long-horizon returns. We apply our techniques to study the cross-section of price levels relative to the capital asset pricing model (CAPM) and find that a single characteristic, adjusted value, provides a parsimonious model of CAPM-implied abnormal price.

Suggested Citation

  • Cho, Thummim & Polk, Christopher, 2024. "Putting the price in asset pricing," LSE Research Online Documents on Economics 120805, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:120805
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    File URL: http://eprints.lse.ac.uk/120805/
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    More about this item

    Keywords

    price level; mispricing metric; novel identity; stochastic discount factor; CAPM;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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