2001a, Covariance risk, mispricing, and the cross section of security returns

- Abstract-This paper oers a model in which asset prices re ect both covariance risk and misperceptions of rms ' prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures (e.g., fundamental/price ratios). With many securities, mispricing of idiosyncratic value components diminishes but systematic mispricing does not. The theory oers untested empirical implications about volume, volatility, fundamental/price ratios, and mean returns, and is consistent with several empirical ndings. These include the ability o