Putting the Price in Asset Pricing

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.