The Relationship Between Return and Market Value of Common Stocks
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What they found
Banz found that between 1936 and 1975, smaller NYSE firms earned higher risk-adjusted returns than larger firms, even after accounting for their market beta. The effect was concentrated in the very smallest firms and was not linear across the size spectrum. This 'size effect' was the first widely accepted anomaly relative to the CAPM and started the search for additional risk factors.
What you can use
- The size premium is where the modern factor literature started.
- The premium comes almost entirely from the tiniest, least liquid stocks, which are the most expensive to trade.
- The size effect has been weak or absent in U.S. data since its publication, a classic case of an anomaly fading.
Caveats
Sample ends in 1975; the size premium has been inconsistent since the early 1980s and is partly a January and microcap-liquidity effect. Gross of costs.
Tags: factor, size, anomalies, equities
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.