IFin Seminar, Thummim Cho, London School of Economics - "Asset Pricing with Price Levels"
Institute of Finance
Date: 20 February 2020 / 12:25 - 13:40
Seminar Title: "Asset Pricing with Price Levels"
Prof Thummim Cho, London School of Economics
12:25 - 13:40
Auditorium (main building, 3rd level)
Lugano Campus
Abstract
We derive an exact identity linking future abnormal returns to current price-level deviations in order to estimate asset-pricing models using price levels rather than returns. Our identity highlights that abnormal returns occurring sooner, ignore valuable states, or after relatively large capital gains are associated with larger price-level deviations. With our novel approach in hand, we measure the extent to which several well-known return anomalies are associated with price-level distortions. We find that the CAPM does a relatively good job describing the cross-section of average price levels of both book-to-market- and quality-sorted portfolios in isolation, but portfolios formed from double sorts on these two variables generate significant variation in price-level mispricing. We also show that investment, beta, and net equity issuance sorts present a challenge in this regard. Thus, our approach prioritizes which CAPM anomalies are more important to both long-horizon investors and researchers testing models from the price-level perspective.
