Putting the Price in Asset Pricing

We propose a novel way to estimate a portfolio's \textit{mispricing}---a deviation of price from the present value of future dividends---with respect to an 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. Applying our techniques to study the cross-section of price levels relative to the CAPM, we find that a single characteristic dubbed abnormal profitability summarizes CAPM mispricing that both long-term buy-and-hold investors and researchers disciplining models from the price perspective should prioritize.

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