The Price Is (Almost) Right

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Publication Details

Output type: Journal article

Author list: Cohen RB, Polk C, Vuolteenaho T

Publisher: Wiley

Publication year: 2009

Journal: The Journal of Finance (0022-1082)

Volume number: 64

Issue number: 6

Start page: 2739

End page: 2782

Number of pages: 44

ISSN: 0022-1082

eISSN: 1540-6261

Languages: English-Great Britain (EN-GB)

Unpaywall Data

Open access status: closed

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.

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