34 Pages Posted: 10 Jun 2012 Last revised: 1 Feb 2013
Date Written: January 28, 2013
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: Suggested Citation