Mispricing in Linear Asset Pricing Models∗
نویسنده
چکیده
In the framework of a reduced form asset pricing model featuring linear-in-z betas and risk premiums with lagged macro instruments, I propose a clean measure of mispricing that is free from the omitted-variable bias due to either missing priced factors or missing instruments. Applying the model to U.S. stock returns for 1927-2005, I find that momentum and contrarian strategies are related to the mispricing measure that does not vary with the macro variables. Moreover, a zero-dollar strategy intersecting the two effects is highly profitable when applied to both firmand portfolio-level returns, even after controlling for the market, size, value, momentum and liquidity effects. Time-varying betas reduce the mispricing by half or better. JEL Classification: G12, G14
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