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The smallest stocks are not just smaller: global evidence

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  • Lieven De Moor
  • Piet Sercu

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 and French factor portfolios need to be adjusted and their number increased. Specifically, (i) standard asset-pricing models leave pricing errors for the 10% 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 USA 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.

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  • Lieven De Moor & Piet Sercu, 2015. "The smallest stocks are not just smaller: global evidence," The European Journal of Finance, Taylor & Francis Journals, vol. 21(1), pages 51-70, January.
    • Handle: RePEc:taf:eurjfi:v:21:y:2015:i:1:p:51-70
    DOI: 10.1080/1351847X.2013.769889
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    Cited by:

    1. Stereńczak, Szymon & Zaremba, Adam & Umar, Zaghum, 2020. "Is there an illiquidity premium in frontier markets?," Emerging Markets Review, Elsevier, vol. 42(C).
    2. Ananjan Bhattacharyya & Abhijeet Chandra, 2016. "The Cross-section of Expected Returns on Penny Stocks: Are Low-hanging Fruits Not-so Sweet?," Papers 1610.01338, arXiv.org.
    3. Zaremba, Adam & Karathanasopoulos, Andreas & Maydybura, Alina & Czapkiewicz, Anna & Bagheri, Noushin, 2020. "Dissecting anomalies in Islamic stocks: Integrated or segmented pricing?," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    4. Victoria Atanasov & Thomas Nitschka, 2013. "The Size Effect in Value and Momentum Factors: Implications for the Cross-section of International Stock Returns," Tinbergen Institute Discussion Papers 13-180/IV/DSF66, Tinbergen Institute.
    5. Adam ZAREMBA, 2015. "Low Risk Anomaly In The Cee Stock Markets," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 81-102, September.
    6. Zaremba, Adam & Okoń, Szymon & Asyngier, Roman & Schroeter, Lucia, 2019. "Reverse splits in international stock markets: Reconciling the evidence on long-term returns," Research in International Business and Finance, Elsevier, vol. 47(C), pages 552-562.
    7. Zaremba, Adam & Maydybura, Alina, 2019. "The cross-section of returns in frontier equity markets: Integrated or segmented pricing?," Emerging Markets Review, Elsevier, vol. 38(C), pages 219-238.

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