Are there exploitable size and momentum effects among international stocks? In their August 2015 paper entitled “Size and Momentum Profitability in International Stock Markets”, Peter Schmidt, Urs Von Arx, Andreas Schrimpf, Alexander Wagner and Andreas Ziegler examine the size effect and the interplay between size and momentum strategies via long-short stock portfolios in 23 countries. They measure stock size as market capitalization and consider several ways of measuring the difference in average returns and four-factor (market, size, book-to-market, momentum) alphas between value-weighted portfolios of small stocks and big stocks. They measure stock momentum as return from 12 months ago to one month ago, with a skip-month between ranking and value-weighted portfolio formation. They assess net portfolio performance in three ways: (1) imposing estimated trading frictions (0.3%-0.4% for small stocks and 0.15% for big stocks); (2) calculating the maximum trading frictions an investor could bear; and, (3) calculating U.S. dollar trading volume for each portfolio. Using stock data for the U.S. during 1985 through 2012 and for 22 other countries mostly during 1991 through 2012, they find that:
- Regarding the size effect:
- There are large gross size effects in several countries, driven by the smallest 10%-20% of stocks.
- The size effect varies considerably across countries.
- These effects are likely unexploitable due to the tiny capacities (high impact of trading on price) associated with the smallest tenth (or even fifth) of stocks.
- Regarding the interaction of size and momentum effects:
- Gross momentum profitability relates negatively to size.
- A substantial part of the gross momentum effect comes from the long (winner) side, which exhibits a large size effect. In other words, small winners are important to momentum profitability.
- High portfolio turnover and associated trading frictions strongly impact net momentum strategy profitability.
- For medium-sized stocks, momentum strategies offer economically and statistically significant net profitability in most countries. For big stocks, momentum profits are substantial in only a few countries (and alphas are non-positive).
In summary, evidence indicates that medium-sized stocks are the best bet for accessing the momentum effect in global markets.
Cautions regarding findings include:
- Individual investors would likely access the kinds of strategies described in the paper through funds, thereby paying fund fees on top of trading frictions.
- The sampled decades of the 1990s and 2000s may not be representative of long-term stock anomaly behaviors.
