Market-to-book ratio in stochastic portfolio theory

Donghan Kim ()
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Donghan Kim: University of Michigan

Finance and Stochastics, 2023, vol. 27, issue 2, No 4, 434 pages

Abstract: Abstract We study market-to-book ratios of stocks in the context of stochastic portfolio theory. Functionally generated portfolios that depend on auxiliary economic variables other than relative capitalisations (“sizes”) are developed in two ways, together with their relative returns with respect to the market. This enables us to identify the value factor (i.e., market-to-book ratio) in returns of such generated portfolios when the auxiliary variables are stocks’ book values. Examples of portfolios, as well as their empirical results, are given, with the evidence that in addition to size, the value factor does affect the performance of the portfolio.

Keywords: Book value; Market-to-book ratio; Stochastic portfolio theory; Functional generation of portfolios; 60G44; 60H05; 91B70; 91G10 (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00780-023-00501-5

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