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Risk‐based explanation for the book‐to‐market effect
Author(s) -
Chen Jerry W.
Publication year - 2012
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2011.00442.x
Subject(s) - portfolio , stock (firearms) , stock market , economics , financial economics , asset (computer security) , asset allocation , context (archaeology) , computer science , engineering , computer security , mechanical engineering , paleontology , biology
This paper proposes a risk‐based explanation for the book‐to‐market ( B / M ) effect. I decompose B / M into net operating asset‐to‐market ( NOA / M ) and net financing asset‐to‐market ( NFA / M ) components. Portfolio analysis shows that (i) positive B / M , NOA / M and NFA / M are positively related to future returns and (ii) negative B / M , NOA / M and NFA / M are negatively related to future returns. To the extent that positive B / M , NOA / M and NFA / M act as measures of asset risk and negative B / M , NOA / M and NFA / M act as inverse measures of borrowing risk, the nonlinear relations between B / M , NOA / M and NFA / M and future returns provide some evidence to support the risk‐based explanation for the book‐to‐market effect in stock returns.