Size Effect, Methodological Issues and 'Risk-to-Default': Evidence from the UK Stock Market

The European Journal of Finance, Vol. 14, No. 4, pp. 299-314, June 2008

Posted: 6 Jun 2008  

Panagiotis Andrikopoulos

University of Coventry

Arief Daynes

University of Portsmouth - Business School

David Latimer

Portsmouth Business School

Paraskevas Pagas

University of Portsmouth

Abstract

This paper re-examines the small firm premium in the UK from December 1987 to December 2004 using a new survivorship bias-free and look-ahead bias-free database of the UK market covering stocks officially listed in the UK during this period. Prior research (Dimson, E., and P.R. Marsh. 1987. The Hoare Govett smaller companies index for the UK. Hoare Govett Limited, January; Dimson, E., and P.R. Marsh. 1999. Murphy's law and market anomalies. Journal of Portfolio Management 25, no. 2: 53-69) documented an annual small-size premium in the UK market of around 6% during the period 1955-1986 and an annual small-size discount of 6% during the years 1989-1997. Our results show a continuation of the small firm premium in the UK during 1988-2004 in excess of 7% per year.We conclude that the reversal of the small firm premium documented by Dimson and Marsh (1999. Murphy's law and market anomalies. Journal of Portfolio Management 25, no. 2: 53-69) is dependent on the data sample and methodology used. The main contribution to the 7% geometric annual premium reported here comes mainly during the years 1993 and 1999. Furthermore, exploitation of the small firm premium depends on the strategy used and in particular on the length of the holding period before rolling over the strategy. Thus, while it can be argued that an economically significant small firm anomaly continues to exist, it appears to be sample-dependent, time-varying and unreliable, and difficult to exploit in practice.

Keywords: Small-size effect, market efficiency, methodological issues, UK equity market

JEL Classification: G11, G14

Suggested Citation

Andrikopoulos, Panagiotis and Daynes, Arief and Latimer, David and Pagas, Paraskevas, Size Effect, Methodological Issues and 'Risk-to-Default': Evidence from the UK Stock Market. The European Journal of Finance, Vol. 14, No. 4, pp. 299-314, June 2008. Available at SSRN: https://ssrn.com/abstract=1141434

Panagiotis Andrikopoulos (Contact Author)

University of Coventry ( email )

Priory Street
Coventry, CV1 5FB
United Kingdom
+44(0)247 765 7920 (Phone)

Arief Daynes

University of Portsmouth - Business School ( email )

Portsmouth, PO1 3DE
United Kingdom
+44 23 92844182 (Phone)
+44 23 92844037 (Fax)

HOME PAGE: http://www.port.ac.uk/departments/academic/ams/staff/title,1246,en.html

David Latimer

Portsmouth Business School ( email )

Portsmouth, PO1 3DE
United Kingdom

Paraskevas Pagas

University of Portsmouth ( email )

Department of Accounting and Finance
Portsmouth Business School
Portsmouth, Hants PO1 3DE
United Kingdom
+44(0)23 9284 4721 (Phone)
+44(0)23 9284 4037 (Fax)

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