Revisiting the price effect in US stocks

Abstract

Nominal price does not predict average stock returns in the cross-section of US stocks using the NYSE break-pointed, value-weighted portfolio formation approach adopted in the recent asset-pricing literature. The evidence in support of return predictability is largely constrained to small stocks, with a “low price effect” more prevalent up to the 1970’s and a “high price effect” more prevalent from 1980 onwards. Among the six asset-pricing models tested in our study, only the Fama–French 3-factor model consistently yields positive alphas for trading strategies based on nominal stock prices.