Size Effect

Studies of the U.S. stock market indicate that some factors and indicators may have predictive power for future returns. Do these findings consistently translate to other large equity markets? In the July 2010 version of their paper entitled “The Cross-Section of German Stock Returns: New Data and New Evidence”, Sabine Artmann, Philipp Finter, Alexander Kempf, Stefan Koch and Erik Theissen apply a new set of single-sorted and double-sorted factor portfolios based on market beta, size, book-to-market ratio and momentum to test for beta effect, size effect, value premium and momentum in the German equity market. In the July 2010 version of their paper entitled “The Impact of Investor Sentiment on the German Stock Market”, Philipp Finter, Alexandra Niessen-Ruenzi and Stefan Ruenzi test the predictive power of a composite sentiment measure combining consumer confidence, net equity mutual funds flow, put-call ratio, aggregate trading volume, initial public offering (IPO) returns, number of IPOs and aggregate equity-to-debt ratio of new issues. Using data for 955 non-financial German firms for which sufficient data is available during the period 1960-2006 for the factor portfolios and 1993-2006 for the sentiment measure, these studies find that: Keep Reading

Is there a common factor explaining multiple widely accepted stock return anomalies? In the March 2010 version of their paper entitled “Do Five Asset Pricing Anomalies Share a Common Mispricing Factor?Multifaceted Empirical Analyses of Failure Risk Proxies, External Financing, and Stock Returns” , Joseph Ogden and Julie Fitzpatrick investigate the ability of a single factor, involving operating profit and external financing, to explain five stock return  anomalies: (1) the failure-risk anomaly; (2) earnings momentum; (3) the external financing (stock buybacks/secondary offerings) anomaly; (4) the accruals anomaly; and, (5) the book-to-market anomaly.  Using monthly stock return and firm fundamentals data for a broad sample of U.S. stocks to form 205 portfolios over the period 1974-2008 (60,301 firm-year observations), they find that: Keep Reading

Is the value premium readily accessible for individual investors? Which value strategy works best? In his May 2009 article entitled “Can Individual Investors Capture The Value Premium?”, Patrick Larkin uses a ranking methodology to compare the performances of Joel Greenblatt’s magic formula and seven other one and two-factor growth at a reasonable price (GARP) and value strategies. The portfolios for the eight strategies derive from rankings on: (1) the magic formula, a combination of return on capital (ROC) and the ratio of earnings before interest and taxes to Enterprise Value ((EBIT/EV); (2) a combination of return on assets (ROA) and earnings yield (E/P); (3) a combination of return on equity (ROE) and E/P; (4) EBIT/EV alone; (5) E/P alone; (6) a combination of book-to-market ratio (B/M) and market capitalization (Size); (7) B/M alone; and, (8) Size alone. Each month, the author forms equally weighted portfolios of the 30 highest-ranking stocks for each of these eight strategies. Using monthly stock return and GARP-value metric data for a broad sample of firms with market capitalizations over $50 million during December 1998-2006 (97 months), he finds that: Keep Reading

Are the size effect and the value premium peculiar to 20th century markets, or are they enduring characteristics of equity market behavior? In the January 2009 preliminary version of their paper entitled “The Asset Pricing Anomalies in 19th Century Britain”, Qing Ye, Charles Hickson and John Turner measure the size and value anomalies using an original 19th century dataset. Using monthly stock prices and annual dividends for 1,051 stocks traded on the London Stock Exchange during March 1825 to December 1870, they conclude that: Keep Reading

Do stocks in Australia confirm pervasiveness of the value premium and the size effect? In their August 2008 paper entitled “Size and Book-to-market Factors in Australia”, Michael O’Brien, Tim Brailsford and Clive Gaunt measure the value premium and the size effect in the Australian market. Using company-specific accounting information from annual reports and contemporaneous stock prices for 98% of all Australian listed firms during 1982-2006 (25 years), they conclude that: Keep Reading

Are momentum trading strategies reliable and economically significant after trading frictions for large-capitalization stocks? In his November 2006 paper entitled “Alpha Generating Momentum Strategies”, Gregor Obrecht test 32 momentum trading strategies on large-capitalization U.S. stocks. The strategies encompass all combinations of: formation periods of three, six, nine and 12 months; wait periods of zero months and one month; and, holding periods of three, six, nine and 12 months. Using monthly returns for S&P 100 stocks over the period 12/85-8/06, he concludes that: Keep Reading

Is an adaptive marketplace extinguishing the January effect? In their June 2008 paper entitled “The Persistence of the Small Firm/January Effect: Is it Consistent with Investors’ Learning and Arbitrage Efforts?”, Kathryn Easterday, Pradyot Sen and Jens Stephan investigate whether the stock market has adapted over time to diminish the small firm/January effect. Using returns and firm size data for a very large sample of stocks over three subperiods (1946-1962, 1963-1979, 1980-2007), they conclude that: Keep Reading

Why do equal-weighted portfolios tend to outperform capitalization-weighted portfolios? Is this tendency related to the size effect? In the May 2008 update of their paper entitled “The Effect of Value Estimation Errors On Portfolio Growth Rates”, Robert Ferguson, Dean Leistikow, Joel Rentzler and Susana Yu examine how value estimation (stock valuation) errors affect long-term returns for several portfolio weighting methods. Based on simple assumptions and general statistical analysis, they conclude that: Keep Reading

Do investors price stocks based mostly on rational analysis or feelings? In their February 2008 paper entitled “Affect in a Behavioral Asset Pricing Model”, Meir Statman, Kenneth Fisher and Deniz Anginer use survey results to investigate both the objective and subjective (perceived) connections between risk and return. Using results of: (1) the 1982-2006 annual Fortune surveys of senior executives, directors and security analysts regarding the long-term investment value of companies; and (2) May and July 2007 surveys of high-net worth clients of a large investment firm, they conclude that: Keep Reading

Which stock return anomalies are trustworthy, and which are not? In the June 2007 draft of their paper entitled “Dissecting Anomalies”, Eugene Fama and Kenneth French apply both sorts and regressions to examine the robustness of the momentum, net stock issuance, accruals, profitability and asset growth anomalies. They note that sorts on an anomaly variable offer a simple picture of how average returns vary, but microcaps (a few big stocks) can dominate the performance of a sort-based equal-weighted (value-weighted) hedge portfolio. In addition, sorts are ill-suited to determinations of: (1) the exact relationship between an anomaly variable and returns, and (2) relationships among anomalies. They note also that extreme behavior by microcaps and outliers generally can distort inference from regressions. Using a robust set of firm data for a broad set of U.S. stocks allocated to three size groups (microcap, small and big) over the period 1963-2005, they conclude that: Keep Reading