Value and Size Effects: Now You See it, Now You Don't
32 Pages Posted: 21 Mar 2002
Date Written: February 2002
The empirical finding that small stock returns exceed big stock returns (size premium), and that value stock returns exceed growth stock returns (value premium) has been extensively studied in the past. In this paper, we analyse the size premium and value premium for a cross-section of European stocks. The focus in this paper is on the evaluation of the robustness of the findings. We find a large size premium, but we also find that this premium only exists in the cross-section of the whole European market. If small and big stocks are selected relative to the market size of the country, the strategy is no longer profitable. As for the value premium, we find that the strategy is not profitable. When the value and growth portfolios are equally weighted there is a significant premium of about 7% on an annual basis. However, this premium is explained by the size effect. Finally, we observe that accounting for the look-ahead bias is important in the estimation of the value premium in Europe.
Keywords: book-to-market, size, value strategy
JEL Classification: G12, G15
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