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The Price Is (Almost) Right

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  • RANDOLPH B. COHEN
  • CHRISTOPHER POLK
  • TUOMO VUOLTEENAHO

Abstract

Most previous research tests market efficiency using average abnormal trading profits on dynamic trading strategies, and typically rejects the joint hypothesis of market efficiency and an asset pricing model. In contrast, we adopt the perspective of a buy-and-hold investor and examine stock price levels. For such an investor, the price level is more relevant than the short-horizon expected return, and betas of cash flow fundamentals are more important than high-frequency stock return betas. Our cross-sectional tests suggest that there exist specifications in which differences in relative price levels of individual stocks can be largely explained by their fundamental betas. Copyright (c) 2009 the American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2009.01516.x
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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 64 (2009)
Issue (Month): 6 (December)
Pages: 2739-2782

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Handle: RePEc:bla:jfinan:v:64:y:2009:i:6:p:2739-2782

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References

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Citations

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Cited by:
  1. John Y. Campbell & Tuomo Vuolteenaho, 2003. "Bad Beta, Good Beta," Harvard Institute of Economic Research Working Papers 2016, Harvard - Institute of Economic Research.
  2. Malcolm Baker & Stefan Nagel & Jeffrey Wurgler, 2006. "The Effect of Dividends on Consumption," NBER Working Papers 12288, National Bureau of Economic Research, Inc.
  3. Ravi Jagannathan & Srikant Marakani, 2011. "Price Dividend Ratio Factors : Proxies for Long Run Risk," NBER Working Papers 17484, National Bureau of Economic Research, Inc.
  4. repec:wyi:journl:002153 is not listed on IDEAS
  5. Dong Lou & Christopher Polk, . "Inferring Arbitrage Activity from Return Correlations," FMG Discussion Papers dp721, Financial Markets Group.
  6. Nitschka, Thomas, 2006. "Does sensitivity to cashflow news explain the value premium on European stock markets?," Technical Reports 2006,12, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
  7. Hui Guo & Robert Savickas & Zijun Wang & Jian Yang, 2006. "Is value premium a proxy for time-varying investment opportunities: some time series evidence," Working Papers 2005-026, Federal Reserve Bank of St. Louis.
  8. Paugam, Luc, 2011. "Valorisation et reporting du goodwill : enjeux théoriques et empiriques," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8007 edited by Casta, Jean-François.
  9. Chen, Huafeng (Jason), 2011. "Firm life expectancy and the heterogeneity of the book-to-market effect," Journal of Financial Economics, Elsevier, vol. 100(2), pages 402-423, May.
  10. Alan Gregory & Julie Whittaker, 2013. "Exploring the Valuation of Corporate Social Responsibility—A Comparison of Research Methods," Journal of Business Ethics, Springer, vol. 116(1), pages 1-20, August.
  11. Tano Santos & Pietro Veronesi, 2005. "Cash-Flow Risk, Discount Risk, and the Value Premium," NBER Working Papers 11816, National Bureau of Economic Research, Inc.
  12. Jean-François Casta & Luc Paugam & Hervé Stolowy, 2011. "Non-additivity in accounting valuation: Internally generated goodwill as an aggregation of interacting assets," Post-Print halshs-00541525, HAL.
  13. Santos, Tano & Veronesi, Pietro, 2010. "Habit formation, the cross section of stock returns and the cash-flow risk puzzle," Journal of Financial Economics, Elsevier, vol. 98(2), pages 385-413, November.
  14. Lewellen, Jonathan, 2010. "Accounting anomalies and fundamental analysis: An alternative view," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 455-466, December.

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