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The impact of size and book-to-market among paired stocks

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  • Hannes Mohrschladt

    (University of Münster)

Abstract

The return premiums associated with size and book-to-market also emerge between paired stocks of very similar firms. The Sharpe ratios of the traditional Fama–French-factors SMB and HML can be more than doubled if this new pair-based approach is applied. Moreover, the proposed investment strategies are particularly profitable among illiquid stocks and around earnings announcements and still yield significant premiums after 1990, while the Fama–French-factors do not. The empirical tests indicate that parts of the return premiums are due to behavioral biases indicating that investors could profit from the apparent mispricing without increasing their risk exposure.

Suggested Citation

  • Hannes Mohrschladt, 2018. "The impact of size and book-to-market among paired stocks," Journal of Asset Management, Palgrave Macmillan, vol. 19(6), pages 384-393, October.
    • Handle: RePEc:pal:assmgt:v:19:y:2018:i:6:d:10.1057_s41260-018-0089-4
    DOI: 10.1057/s41260-018-0089-4
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    More about this item

    Keywords

    Paired stocks; Fama–French-factors; Investment strategy; Size; Book-to-market; Behavioral finance;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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