1998/06/01 by Jonathan B. Berk, Jonathan Berk, Richard C. Green +2 · 1 citation
Economics, Econometrics and Finance · #Capital Investment and Risk Analysis #Financial Markets and Investment Strategies #Stochastic processes and financial applications
paper · pdf · doi:10.1111/0022-1082.00161
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.