Asset Pricing and Mispricing

44 Pages Posted: 10 Jul 2006

See all articles by Michael J. Brennan

Michael J. Brennan

University of California, Los Angeles (UCLA) - Finance Area

Ashley Wang

Board of Governors of the Federal Reserve System

Date Written: January 2007

Abstract

In this paper we develop models for stock returns when stock prices are subject to stochastic mispricing errors. We show that expected rates of return depend not only on the fundamental risk that is captured by a standard asset pricing model, but also on the type and degree of asset mispricing, even when the mispricing is zero on average. Empirically, the mispricing induced return bias, proxied either by Kalman filter estimates or by volatility and variance ratio of residual returns, are shown to be significantly associated with realized risk adjusted returns.

JEL Classification: G10, G12

Suggested Citation

Brennan, Michael John and Wang, Ashley, Asset Pricing and Mispricing (January 2007). Available at SSRN: https://ssrn.com/abstract=912814 or http://dx.doi.org/10.2139/ssrn.912814

Michael John Brennan

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825 3587 (Phone)
310-206 8419 (Fax)

Ashley Wang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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