TY  - JOUR
AU  - Cohen,Randolph B.
AU  - Polk,Christopher
AU  - Vuolteenaho,Tuomo
TI  - The Price is (Almost) Right
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10131
PY  - 2003
Y2  - December 2003
UR  - http://www.nber.org/papers/w10131
L1  - http://www.nber.org/papers/w10131.pdf
N1  - Author contact info:
Randolph Cohen
MIT
E-Mail: rbcohen@mit.edu

Christopher Polk
Department of Finance
London School of Economics
Houghton St.
London WC2A 2AE
UK
Tel: +44 (0)20 7849 4917
Fax: +44 (0)20 7852 3580
E-Mail: c.polk@lse.ac.uk

Tuomo Vuolteenaho
Arrowstreet Capital
200 Clarendon Street #30
Boston, MA 02116-5021
Tel: 617/496-6284
Fax: 617/495-8570
E-Mail: tvuolteenaho@arrowstreetcapital.com
AB  - Most previous research tests market efficiency and asset pricing models using average abnormal trading profits on dynamic trading strategies, and typically rejects the joint hypothesis. In contrast, we measure the ability of a simple risk model and the efficient-market hypothesis to explain the level of stock prices. First, we find that cash-flow betas (measured by regressing firms' earnings on the market's earnings) explain the prices of value and growth stocks well, with a plausible premium. Second, we use a present-value model to decompose the cross-sectional variance of firms' price-to-book ratios into two components due to risk-adjusted fundamental value and mispricing. When we allow the discount rates to vary with cash-flow betas, the variance share of mispricing is negligible.
ER  -