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Market-to-book ratio in stochastic portfolio theory

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  • Donghan Kim

    (University of Michigan)

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.

Suggested Citation

  • Donghan Kim, 2023. "Market-to-book ratio in stochastic portfolio theory," Finance and Stochastics, Springer, vol. 27(2), pages 401-434, April.
    • Handle: RePEc:spr:finsto:v:27:y:2023:i:2:d:10.1007_s00780-023-00501-5
    DOI: 10.1007/s00780-023-00501-5
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    References listed on IDEAS

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    Cited by:

    1. Steven Campbell & Qien Song & Ting-Kam Leonard Wong, 2024. "Macroscopic properties of equity markets: stylized facts and portfolio performance," Papers 2409.10859, arXiv.org.

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    More about this item

    Keywords

    Book value; Market-to-book ratio; Stochastic portfolio theory; Functional generation of portfolios;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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