The 'Size Premium' in Equity Markets: Where Is the Risk?

10 Pages Posted: 15 Aug 2017 Last revised: 23 Aug 2017

See all articles by Stefano Ciliberti

Stefano Ciliberti

Capital Fund Management

Emmanuel Sérié

Capital Fund Management

Guillaume Simon

Capital Fund Management

Yves Lemperiere

Capital Fund Management

Jean-Philippe Bouchaud

Capital Fund Management

Date Written: August 23, 2017

Abstract

We find that when measured in terms of dollar-turnover, and once beta-neutralised and Low-Vol neutralised, the Size Effect is alive and well. With a long term t-stat of 5.1, the “Cold-Minus-Hot” (CMH) anomaly is certainly not less significant than other well-known factors such as Value or Quality. As compared to market-cap based SMB, CMH portfolios are much less anti-correlated to the Low-Vol anomaly. In contrast with standard risk premia, size-based portfolios are found to be virtually unskewed. In fact, the extreme risk of these portfolios is dominated by the large cap leg; small caps actually have a positive (rather than negative) skewness. The only argument that favours a risk premium interpretation at the individual stock level is that the extreme drawdowns are more frequent for small cap/turnover stocks, even after accounting for volatility. This idiosyncratic risk is however clearly diversifiable.

Keywords: Small Minus Big, SMB, Size, Risk Premium, Equities, Cold Minus Hot, Beta Neutrality

JEL Classification: G02, G11, G14, G19

Suggested Citation

Ciliberti, Stefano and Sérié, Emmanuel and Simon, Guillaume and Lemperiere, Yves and Bouchaud, Jean-Philippe, The 'Size Premium' in Equity Markets: Where Is the Risk? (August 23, 2017). Available at SSRN: https://ssrn.com/abstract=3018454 or http://dx.doi.org/10.2139/ssrn.3018454

Stefano Ciliberti

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Emmanuel Sérié

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Guillaume Simon (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Yves Lemperiere

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Jean-Philippe Bouchaud

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

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