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Growth Options and The Cross-Section of Residual Variances
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We show that when we remove from total variance the business cycle variance as
captured by the Chen, Roll, and Ross (1986) macroeconomic factors, these stocks
actually have a larger residual variance as a fraction of total variance. This residual
variance is informative of the stock of unexercised growth options that emerge upon
arrival of embodied technological shocks. We nd that: (i) stocks with high average
returns have high residual variance and a larger stock of growth options to be
depleted; (ii) stocks with low average returns have low residual variance and have
converted most of their growth options into assets in place.
Author(s):
Andreea Mitrache
Toulouse Business School
France