28 Pages Posted: 1 Feb 2012
Date Written: 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 specification decisions, and especially those related to size, may have a significant 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. Specifically, 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.
Keywords: small rm, CAPM, SMB, HML, WML, momentum, distress, Fama, French, pricing error
JEL Classification: G12, G15
Suggested Citation: 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: https://ssrn.com/abstract=1996422 or http://dx.doi.org/10.2139/ssrn.1996422