We show that, when stock prices are subject to stochastic mispricing errors, as a result of Jensen's inequality, expected rates of return may depend not only on the fundamental risk that is captured by a standard asset pricing model, but also on the type and degree of asset mispricing, even when...

A simple valuation model that allows for time variation in investment opportunities is developed and estimated. The model assumes that the investment opportunity set is completely described by two state variables, the real interest rate and the maximum Sharpe ratio, which follow correlated...

Characterizing the instantaneous investment opportunity set by the real interest rate and the maximum Sharpe ratio, a simple model of time varying investment opportunities is posited in which these two variables follow correlated Ornstein-Uhlenbeck processes, and the implications for stock and...

In this paper we develop models for stock returns when stock prices are subject to stochastic mispricing errors. We show that expected rates of return depend not only on the fundamental risk that is captured by a standard asset pricing model, but also on the type and degree of asset mispricing,...