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Book-to-Market Ratio

In: Risk and Return in Asian Emerging Markets

Author

Listed:
  • Nusret Cakici
  • Kudret Topyan

Abstract

The book-to-market ratio is the book value of equity divided by market value of equity. The underlined book-to-market effect is also termed as value effect. The book-to-market effect is well documented in finance. In general, high book-to-market stocks, also referred as value stocks, earn significant positive excess returns while low book-to-market stocks, also referred as growth stocks, earn significant negative excess returns. Both, Fama and French (1992) and Lakonishok, Shleifer, and Vishny (1994) reported that book-to-market ratio is strongly correlated with the stock’s future performance and highlight it as a popular return predictor. They are, however, in disagreement concerning the source of book-to-market effect: Fama and French (1992) attribute this to unobserved risk factors, while Lakonishok, Shleifer, and Vishny (1994) attribute it to mispricing. As a result, the observed correlation might be originated from risk-related factors as well as mispricing.

Suggested Citation

  • Nusret Cakici & Kudret Topyan, 2014. "Book-to-Market Ratio," Palgrave Macmillan Books, in: Risk and Return in Asian Emerging Markets, chapter 0, pages 121-133, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-35907-0_9
    DOI: 10.1057/9781137359070_9
    as

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