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The Mispricing Return Premium

Michael J. Brennan1,2; Ashley Wang3,4

1 University of Manchester · 2 Manchester University · 3 Federal Reserve · 4 Federal Reserve Board of Governors

Review of Financial Studies 2010

We show that, when stock prices are subject to stochastic mispricing errors, expected rates of return may 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 premium, either estimated using a Kalman filter or proxied by the volatility and variance ratio of residual returns, is shown to be significantly associated with realized risk-adjusted returns.

DOI
10.1093/rfs/hhq064
Volume
23 (9)
Pages
3437-3468
Language
en
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