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The Price is (Almost) Right / Randolph B. Cohen, Christopher Polk, Tuomo Vuolteenaho.
- Format:
- Book
- Author/Creator:
- Cohen, Randolph B.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w10131.
- NBER working paper series no. w10131
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- Price is
- The Price is
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2003.
- Summary:
- 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.
- Notes:
- Print version record
- December 2003.
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