Predictable Dynamics in the Small Stock Premium

34 Pages Posted: 10 Jun 2012 Last revised: 1 Feb 2013

Valeriy Zakamulin

University of Agder - School of Business and Law

Date Written: January 28, 2013

Abstract

We start this paper by providing a detailed study of how the mean monthly return on the Small-Minus-Big (SMB) Fama-French factor is affected by the January effect and the stock market return during the preceding month and preceding calendar year. We then proceed to building a predictive model for the monthly SMB factor return that incorporates the January effect and the dependence on both the market return during the preceding month and preceding calendar year. Our findings suggest that a positive small stock premium appears mainly during the years following the years with a negative return on the market as the result of a delayed and stronger reaction of small stocks to good news and a stronger January effect. We also argue that the January effect constitutes a much lesser part of the size effect than it was previously supposed.

Keywords: size effect, size premium, January effect, stock return predictability

JEL Classification: C13, G12, G17

Suggested Citation

Zakamulin, Valeriy, Predictable Dynamics in the Small Stock Premium (January 28, 2013). Available at SSRN: https://ssrn.com/abstract=2080404 or http://dx.doi.org/10.2139/ssrn.2080404

Valeriy Zakamulin (Contact Author)

University of Agder - School of Business and Law ( email )

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Kristiansand, N-4604
Norway
+47 38141039 (Phone)

HOME PAGE: http://vzakamulin.weebly.com/

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