IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

The economic significance of trading based on the size effect in Australia

Listed author(s):
  • Jenni L Bettman
  • Wen Sern Kelvin Ng

    (School of Finance, Actuarial Studies and Applied Statistics, Research School of Business, Australian National University, Australia)

  • Stephen J Sault

    (School of Finance, Actuarial Studies and Applied Statistics, Research School of Business, Australian National University, Australia)

Registered author(s):

    It is generally accepted within the extant literature that a size effect exists, whereby smaller firms tend to experience higher rates of return than those of large firms. This small size effect is identified in a number of studies over a variety of equity markets. Despite this, however, no study to date considers the dollar profits attainable by executing a trading strategy that constructs a portfolio based on stocks within the lowest market capitalization decile. Specifically, this paper seeks to identify the existence of a size effect in Australia, but, moreover, attempts to ascertain if a dollar profit can be obtained from executing a trading strategy based on small market capitalization stocks. In doing this, we consider all stocks listed on the Australian stock exchange, and use volume and bid-ask prices to account for liquidity and transactions costs, respectively. Overall, our regression analysis confirms the existence of a size effect within the Australian equity market. However, in executing a trading strategy based on stocks with low market capitalization, we find that after accounting for liquidity and transaction costs the profits obtainable are extremely small and statistically insignificant. This suggests that while the firm size effect exists, the illiquidity and relatively large transaction costs of small stocks eliminate the potential for economic profits.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Article provided by Australian School of Business in its journal Australian Journal of Management.

    Volume (Year): 36 (2011)
    Issue (Month): 1 (April)
    Pages: 59-73

    in new window

    Handle: RePEc:sae:ausman:v:36:y:2011:i:1:p:59-73
    Contact details of provider: Web page:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:sae:ausman:v:36:y:2011:i:1:p:59-73. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (SAGE Publications)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.