The 'Size Premium' in Equity Markets: Where Is the Risk?
Posted: 15 Aug 2017 Last revised: 5 Oct 2019
Date Written: August 23, 2017
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
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