Real Anomalies

We examine the importance of cross-sectional asset pricing anomalies (alphas) for the real economy. We develop a novel quantitative model of the cross-section of firms that features lumpy investment and informational ine ciencies, while yielding distributions in closed form. Our findings indicate that anomalies can cause material real ine ciencies, raising the possibility that agents that help to eliminate them add significant value to the economy. The framework reveals that the magnitude of alphas alone is a poor indicator of real implications, and highlights the importance of alpha persistence, the amount of mispriced capital, and the Tobin’s q of firms a↵ected. JEL classification: D22, D24, D53, D92, E22, G2, G30 ⇤We thank the editor Stefan Nagel and an anonymous referee for their helpful and constructive feedback. Moreover, we thank Andy Abel, Malcolm Baker (discussant), Markus Brunnermeier, John Campbell, Andrea Eisfeldt, Nicolae Gârleanu, Vincent Glode, Itay Goldstein, João Gomes, Urban Jermann, Tom Sargent, Sydney Ludvigson, Hanno Lustig, Stijn van Nieuwerburgh, Dimitris Papanikolaou (discussant), Thomas Philippon (discussant), Krishna Ramaswamy, Rob Stambaugh, Jeremy Stein, Jessica Wachter, Tony Whited, Amir Yaron, and seminar participants at the 7th Advances in Macro-Finance Tepper-LAEF Conference, Berkeley Haas, BI-SHoF Conference on Financial Econometrics, London Business School, Michigan Ross, NBER Summer Institute Asset Pricing, University of Oxford, Princeton University, and the Wharton Conference on Liquidity and Financial Crises for their helpful comments. The authors are at the Wharton School of the University of Pennsylvania and can be reached at julesv@wharton.upenn.edu and opp@wharton.upenn.edu.