TY  - JOUR
AU  - Berk,Jonathan
AU  - Green,Richard C.
AU  - Naik,Vasant
TI  - Optimal Investment, Growth Options, and Security Returns
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6627
PY  - 1998
Y2  - June 1998
UR  - http://www.nber.org/papers/w6627
L1  - http://www.nber.org/papers/w6627.pdf
N1  - Author contact info:
Jonathan B. Berk
Graduate School of Business
Stanford University
518 Memorial Way
Stanford CA 94305-5015
Tel: 650/721-1280
Fax: 650/725-6152
E-Mail: jonathan.b.berk@gmail.com

Richard Green
Tepper School of Business
Carnegie Mellon University
Pittsburgh, PA 15213
Tel: 412/268-2302
E-Mail: rcgreen@cmu.edu

vasant naik
E-Mail: vasant.naik@uk.nomura.com
AB  - As a consequence of optimal investment choices, firms' 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.
ER  -