Covariance Risk, Mispricing, and the Cross Section of Security Returns
AbstractThis paper offers a multisecurity model in which prices reflect both covariance risk and misperceptions of firms' prospects, and in which arbitrageurs trade to profit from mispricing. We derive a pricing relationship in which expected returns are linearly related to both risk and mispricing variables. The model thereby implies a multivariate relation between expected return, beta, and variables that proxy for mispricing of idiosyncratic components of value tends to be arbitraged away but systematic mispricing is not. The theory is consistent with several empirical findings regarding the cross-section of equity returns, including: the observed ability of fundamental/price ratios to forecast aggregate and cross-sectional returns, and of market value but not non-market size measures to forecast returns cross-sectionally; and the ability in some studies of fundamental/price ratios and market value to dominate traditional measures of security risk. The model also offers several untested empirical implications for the cross-section of expected returns and for the relation of volume to subsequent volatility.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7615.
Date of creation: Mar 2000
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- G1 - Financial Economics - - General Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-05-16 (All new papers)
- NEP-FIN-2000-05-16 (Finance)
- NEP-FMK-2000-05-16 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Simon Gervais & Terrance Odean, .
"Learning To Be Overconfident,"
Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research
05-97, Wharton School Rodney L. White Center for Financial Research.
- Gervais, Simon & Odean, Terrance, 2001. "Learning to be Overconfident," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 14(1), pages 1-27.
- Simon Gervais & Terrance Odean, . "Learning To Be Overconfident," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 5-97, Wharton School Rodney L. White Center for Financial Research.
- Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
- Nicholas Barberis & Andrei Shleifer & Robert W. Vishny, 1997.
"A Model of Investor Sentiment,"
NBER Working Papers
5926, National Bureau of Economic Research, Inc.
- Benartzi, Shlomo & Thaler, Richard H, 1995.
"Myopic Loss Aversion and the Equity Premium Puzzle,"
The Quarterly Journal of Economics, MIT Press,
MIT Press, vol. 110(1), pages 73-92, February.
- Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
- Guerdjikova, Ani, 2006. "Portfolio Choice and Asset Prices in an Economy Populated by Case-Based Decision Makers," Working Papers, Cornell University, Center for Analytic Economics 06-13, Cornell University, Center for Analytic Economics.
- Deaves, Richard & LÃ¼ders, Erik & SchrÃ¶der, Michael, 2010.
"The dynamics of overconfidence: Evidence from stock market forecasters,"
Journal of Economic Behavior & Organization, Elsevier,
Elsevier, vol. 75(3), pages 402-412, September.
- Richard Deaves & Erik LÃ¼ders & Michael SchrÃ¶der, 2005. "The dynamics of overconfidence: Evidence from stock market forecasters," CoFE Discussion Paper, Center of Finance and Econometrics, University of Konstanz 05-10, Center of Finance and Econometrics, University of Konstanz.
- Deaves, Richard & LÃ¼ders, Erik & SchrÃ¶der, Michael, 2005. "The Dynamics of Overconfidence: Evidence from Stock Market Forecasters," ZEW Discussion Papers 05-83, ZEW - Zentrum fÃ¼r EuropÃ¤ische Wirtschaftsforschung / Center for European Economic Research.
- Yannick Malevergne & Pedro Santa-Clara & Didier Sornette, 2009. "Professor Zipf goes to Wall Street," NBER Working Papers 15295, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.