The Smallest Stocks are Not Just Smaller: US and International Evidence

Lieven De Moor

Vrije Universiteit Brussel

Piet Sercu

FEB at KU Leuven

November 16, 2011

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 speci fication decisions, and especially those related to size, may have a signifi cant impact on asset pricing test results. We also show that, in data with wider coverage with respect to size, the Fama-French factor portfolios need to be adjusted and their number increased. Specifi cally, standard asset pricing models leave pricing errors for the ten percent smallest stocks, and 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 US 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.

Number of Pages in PDF File: 28

Keywords: small rm, CAPM, SMB, HML, WML, momentum, distress, Fama, French, pricing error

JEL Classification: G12, G15

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Date posted: February 1, 2012  

Suggested Citation

De Moor, Lieven and Sercu, Piet, The Smallest Stocks are Not Just Smaller: US and International Evidence (November 16, 2011). Available at SSRN: http://ssrn.com/abstract=1996422 or http://dx.doi.org/10.2139/ssrn.1996422

Contact Information

Lieven De Moor (Contact Author)
Vrije Universiteit Brussel ( email )
Department of Business
Pleinlaan 2
Brussels, B-1050
+32 498 616463 (Phone)
HOME PAGE: http://goo.gl/qntmYg
Piet M. F. A. Sercu
FEB at KU Leuven ( email )
Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)
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