Size Effect

Case C: Is Size Dead?

A Reassessment of the Small Stock Effect

Maastricht University

School of Business and Economics

Maastricht, 9 November 2012

Hermanns, J i6004628

Ravenhorst, I i6056687

Shen, Z i6046040

Study: Master - Finance

Course code: EBC4112

Case Week 2: Selecting Portfolios with Style – Case C

Tutor name: Mr. Derwall

Assignment: Research Project – Topic 5

Maastricht University

School of Business and Economics

Maastricht, 9 November 2012

Hermanns, J i6004628

Ravenhorst, I i6056687

Shen, Z i6046040

Study: Master - Finance

Course code: EBC4112

Case Week 2: Selecting Portfolios with Style – Case C

Tutor name: Mr. Derwall

Assignment: Research Project – Topic 5

ABSTRACT

This paper reassesses whether a small stock effect exists for multiple national equity markets. This is done by constructing specific portfolios to test whether small stock portfolios significantly outperform large stock portfolios. The used data was retrieved from Kenneth R. French and Datastream and consists of returns for various size portfolios, size indexes and national markets for a long time period. Furthermore, cyclical patterns of returns are investigated. Moreover, this paper assesses whether an investment strategy based on the size effect can be implemented in the real world. The findings of this paper show that the effect of the size effect became negligible from the 1970s onwards. Using more recent and international data, it is found that only for the United States and Sweden a significant outperformance, albeit small, can be observed, while for the selected other countries such an outperformed cannot be statistically proved for the last decade. Furthermore, it is questioned if the size effect exists, if it is possible to exploit this in the real world, due to transaction and management costs. When investigating the cyclical patterns it was found that a relationship between small-cap outperformance and economic turmoil is not robust, however, a significant negative...