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Using Jump-Diffusion Return Models to Measure Differential Information by Firm Size

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  • Brauer, Greggory A.

Abstract

Portfolios of stocks issued by small firms are well known to earn rates of return in excess of those commensurate with their market sensitivities. One common explanation for this phenomenon is that small firm stocks are riskier than large firm stocks because less information is available about the former than about the latter. A necessary condition for such an explanation to be valid is that the information effect not be eliminated by combining the individual stocks into portfolios. This paper uses jump-diffusion return models to gauge the impact of information by firm size. The results show that portfolios of small firm stocks are no more prone to information surprises than are portfolios of large firm stocks. However, portfolios of small firm stocks are found to react more severely than portfolios of large firm stocks when surprises do occur.

Suggested Citation

  • Brauer, Greggory A., 1986. "Using Jump-Diffusion Return Models to Measure Differential Information by Firm Size," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(4), pages 447-458, December.
    • Handle: RePEc:cup:jfinqa:v:21:y:1986:i:04:p:447-458_01
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    Cited by:

    1. Clarkson, Peter M. & Satterly, Amanda, 1997. "Australian evidence on the pricing of estimation risk," Pacific-Basin Finance Journal, Elsevier, vol. 5(3), pages 281-299, July.
    2. Zepp, Thomas M., 2003. "Utility stocks and the size effect--revisited," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 578-582.
    3. Andrey Sarantsev & Blessing Ofori-Atta & Brandon Flores, 2019. "A Stock Market Model Based on CAPM and Market Size," Papers 1907.08911, arXiv.org, revised Apr 2021.
    4. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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