The Price is (Almost) Right / Randolph B. Cohen, Christopher Polk, Tuomo Vuolteenaho.

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Cohen, Randolph B

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w10131.Publication details: Cambridge, Mass. National Bureau of Economic Research 2003.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: Most previous research tests market efficiency and asset pricing models using average abnormal trading profits on dynamic trading strategies, and typically rejects the joint hypothesis. In contrast, we measure the ability of a simple risk model and the efficient-market hypothesis to explain the level of stock prices. First, we find that cash-flow betas (measured by regressing firms' earnings on the market's earnings) explain the prices of value and growth stocks well, with a plausible premium. Second, we use a present-value model to decompose the cross-sectional variance of firms' price-to-book ratios into two components due to risk-adjusted fundamental value and mispricing. When we allow the discount rates to vary with cash-flow betas, the variance share of mispricing is negligible.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w10131 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w10129 Law and Employment: Lessons from Latin America and the Caribbean /	nber w1013 The Proper Measurement of Government Budget Deficits: Comprehensive Wealth Accounting or Permanent Income Accounting for the Public Sector /	nber w10130 Have National Business Cycles Become More Synchronized? /	nber w10131 The Price is (Almost) Right /	nber w10132 Aggregate Consequences of Limited Contract Enforceability /	nber w10133 Entrant Experience and Plant Exit /	nber w10134 Does Child Labor Decline with Improving Economic Status? /	Next

December 2003.

Most previous research tests market efficiency and asset pricing models using average abnormal trading profits on dynamic trading strategies, and typically rejects the joint hypothesis. In contrast, we measure the ability of a simple risk model and the efficient-market hypothesis to explain the level of stock prices. First, we find that cash-flow betas (measured by regressing firms' earnings on the market's earnings) explain the prices of value and growth stocks well, with a plausible premium. Second, we use a present-value model to decompose the cross-sectional variance of firms' price-to-book ratios into two components due to risk-adjusted fundamental value and mispricing. When we allow the discount rates to vary with cash-flow betas, the variance share of mispricing is negligible.