Using data on asset pricing anomalies, I test the idea that the act of arbitrage turns “alphas” into “betas”: Assets with high initial abnormal returns attract more arbitrage and covary endogenously more with systematic factors that arbitrage capital is exposed to. This channel explains the exposures of 40 anomaly portfolios to aggregate funding liquidity shocks and arbitrageur wealth portfolio shocks. My results highlight that financial intermediaries that act as asset market arbitrageurs not only price assets given risks, but also actively shape these risks through their trades.

ABSTRACT We propose a novel way to estimate a portfolio's abnormal price , the percentage gap between price and the present value of dividends computed with a chosen asset pricing model. Our method, based on a novel identity, resembles the time‐series estimator of abnormal returns, avoids the issues in alternative approaches, and clarifies the role of risk and mispricing in long‐horizon returns. We apply our techniques to study the cross‐section of price levels relative to the capital asset pricing model (CAPM) and find that a single characteristic, adjusted value , provides a parsimonious model of CAPM‐implied abnormal price.

Abstract We propose a loglinear present-value identity in which investment (“scale”), profitability (“yield”), and discount rates determine a firm’s market-to-book ratio. Our identity reconciles existing influential market-to-book decompositions and facilitates novel insights from three empirical applications: (1) Both investment and profitability are important contributors to the value spread and stock return news variance. (2) Any cross-sectional return predictability has a mirror image in cash-flow fundamentals, providing asset pricing theories with additional moments to match. (3) The investment spread significantly improves the predictability of time-series variation in the value premium and justifies the poor performance of value in recent years.

Abstract We introduce a present-value identity relating a firm’s market value to expected future markups, output growth, discount rates, and investments. Distinguishing current from expected markups reveals five empirical facts: (1) Expected markups account for half the rise in U.S. firm values since 1980. (2) The rise in aggregate expected markups reflects market-share reallocation toward high-expected-markup firms and within-firm increases. (3) Expected markups are linked to intangible investments. (4) They relate negatively to discount rates over time but (5) positively to abnormal returns across firms. Finally, variation in long-term expected markups is primarily associated with asset prices rather than current markups.