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Size matters, if you control your junk

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  • Asness, Clifford
  • Frazzini, Andrea
  • Israel, Ronen
  • Moskowitz, Tobias J.
  • Pedersen, Lasse H.

Abstract

The size premium has been accused of having a weak historical record, being meager relative to other factors, varying significantly over time, weakening after its discovery, being concentrated among microcap stocks, residing predominantly in January, relying on price-based measures, and being weak internationally. We find, however, that these challenges disappear when controlling for the quality, or its inverse, junk, of a firm. A significant size premium emerges, which is stable through time, robust to specification, not concentrated in microcaps, more consistent across seasons, and evident for non-price-based measures of size, and these results hold in 30 different industries and 24 international equity markets. The resurrected size effect is on par with anomalies such as value and momentum in terms of economic significance and gives rise to new tests of, and challenges for, existing asset pricing theories.

Suggested Citation

  • Asness, Clifford & Frazzini, Andrea & Israel, Ronen & Moskowitz, Tobias J. & Pedersen, Lasse H., 2018. "Size matters, if you control your junk," Journal of Financial Economics, Elsevier, vol. 129(3), pages 479-509.
    • Handle: RePEc:eee:jfinec:v:129:y:2018:i:3:p:479-509
    DOI: 10.1016/j.jfineco.2018.05.006
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    More about this item

    Keywords

    Size premium; Factor models; Quality;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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