Putting the Price in Asset Pricing

Publication Date
Financial Markets Group Discussion Papers DP 897
Publication Date
Paul Woolley Centre Discussion Papers No 97
Publication Authors

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 CAPM, finding that a single characteristic dubbed adjusted value provides a parsimonious model of CAPM-implied abnormal price.