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Market-to-book Ratio in Stochastic Portfolio Theory

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  • Donghan Kim

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 capitalizations ("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.

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  • Donghan Kim, 2022. "Market-to-book Ratio in Stochastic Portfolio Theory," Papers 2206.03742, arXiv.org.
    • Handle: RePEc:arx:papers:2206.03742
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    References listed on IDEAS

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    11. Johannes Ruf & Kangjianan Xie, 2019. "Generalised Lyapunov Functions and Functionally Generated Trading Strategies," Applied Mathematical Finance, Taylor & Francis Journals, vol. 26(4), pages 293-327, July.
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    Cited by:

    1. Erhan Bayraktar & Donghan Kim & Abhishek Tilva, 2024. "Quantifying dimensional change in stochastic portfolio theory," Mathematical Finance, Wiley Blackwell, vol. 34(3), pages 977-1021, July.
    2. Christa Cuchiero & Janka Moller, 2023. "Signature Methods in Stochastic Portfolio Theory," Papers 2310.02322, arXiv.org, revised Oct 2024.

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