Size and Book-to-Market Factors in Australia

Abstract

Prior research in the Australian equity market has failed to fully document the well-known influences of size and book-to-market effects that have been evidenced in other markets. While much is known about the size effect in Australia, data limitations have curtailed attempts to analyse the book-to-market effect. So, the question remains as to whether the value premium exists in Australia or whether it has simply failed to be adequately explored. This study uses a new and specially constructed database that covers 98% of all Australian listed firms over a 25 year period and provides evidence of both a size and value premium in the Australian market. For the first time in Australia, in both time-series and cross-sectional tests, the constructed factors reveal a significantly positive priced premium. The incorporation of these factors in the Fama-French three-factor model reveal the model's superiority over the CAPM.

Keywords: Size effect, Book-to-market effect, CAPM, Asset pricing, Fama-French Three-Factor Model

JEL Classification: G110, G120, G140