1998/06/01 by Jonathan B. Berk, Jonathan Berk, Richard C. Green +2 · 328 citations
Economics, Econometrics and Finance · Mathematics · #Capital Investment and Risk Analysis #Capital asset pricing model #Contrarian #Econometrics #Economics #Financial Markets and Investment Strategies #Financial economics #Investment (military) #Mathematics #Momentum (technical analysis) #Predictability #Relation (database) #Risk premium #Stochastic processes and financial applications #Value premium
paper · pdf · doi:10.1111/0022-1082.00161
published in The Journal of Finance 54(5), 1553-1607 (Wiley)
openalex publication_date 1998/06/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04
As a consequence of optimal investment choices, a firm's assets and growth options change in predictable ways. Using a dynamic model, we show that this imparts predictability to changes in a firm's systematic risk, and its expected return. Simulations show that the model simultaneously reproduces: (i) the time‐series relation between the book‐to‐market ratio and asset returns; (ii) the cross‐sectional relation between book‐to‐market, market value, and return; (iii) contrarian effects at short horizons; (iv) momentum effects at longer horizons; and (v) the inverse relation between interest rates and the market risk premium.