The smallest stocks are not just smaller: US and international evidence
AbstractUsing an international Thomson Reuters Datastream database where size coverage is unusually wide and data errors have been reduced to a low level, we show that some specification decisions, and especially those related to size, may have a significant impact on asset pricing test results. We also show that, in data with wider coverage with respect to size, the Fama-French factor portfolios need to be adjusted and their number increased. Specifically, (i) standard asset pricing models leave pricing errors for the ten percent smallest stocks, and (ii) two additional risk factors (i.e. one micro-stock factor and one extreme book-to- market factor) are needed to capture this mispricing. This holds both in US and international data. Further research is needed to measure the separate relevance of the possible economic interpretations and to identify more economic explanations for the additional risks associated with the smallest stocks.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/328286.
Date of creation: Nov 2011
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small firm; CAPM; SMB; HML; WML; momentum; distress; Fama; French; pricing error;
Other versions of this item:
- De Moor, Lieven & Sercu, Piet, 2011. "The smallest stocks are not just smaller: US and international evidence," Working Papers 2011/28, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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