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The smallest stocks are not just smaller: US and international evidence

Author

Listed:
  • De Moor, Lieven

    (Hogeschool-Universiteit Brussel (HUB), Belgium)

  • Sercu, Piet

    (K.U. Leuven, Faculty of Business and Economics, Research Center of International Finance and Louvain School of Management, Department of Finance)

Abstract

Using 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.

Suggested Citation

  • 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.
    • Handle: RePEc:hub:wpecon:201128
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    small firm; CAPM; SMB; HML; WML; momentum; distress; Fama; French; pricing error;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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    This paper has been announced in the following NEP Reports:

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