Dynamic Asset (Mis)Pricing: Build-up vs. Resolution Anomalies
69 Pages Posted: 18 Feb 2021 Last revised: 25 Jun 2021
Date Written: February 12, 2021
We classify asset pricing anomalies into those that exacerbate mispricing (build-up anomalies) and those that resolve it (resolution anomalies). To this end, we estimate the dynamics of price wedges for a large number of well-known anomaly portfolios in the factor zoo and map them to firm-level mispricings. We find that several prominent anomalies like momentum and profitability further dislocate prices. While mispricing buildup is often quick, the subsequent resolution tends to be slow, suggesting the potential for material real economic consequences. Our results suggest that financial intermediaries chasing build-up anomalies in fact negatively affect price efficiency and associated real capital allocation.
Keywords: Dynamic Price Wedges, Build-up, Resolution, Alphas, Persistence
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation