Fact, Fiction, and the Size Effect

54 Pages Posted: 24 May 2018 Last revised: 10 Aug 2018

Ron Alquist

AQR Capital Management LLC

Ronen Israel

AQR Capital Management, LLC

Tobias J. Moskowitz

Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

Date Written: May 12, 2018

Abstract

In the earliest days of empirical work in academic finance, the size effect was the first market anomaly to challenge the standard asset pricing model and prompt debates about market efficiency. The notion that small stocks have higher average returns than large stocks, even after risk-adjustment, was a pathbreaking discovery, one that for decades has been taken as an unwavering fact of financial markets. In practice, the discovery of the size effect fueled a crowd of small cap indices and active funds to a point where the investment landscape is now segmented into large and small stock universes. Despite its long and illustrious history in academia and its commonplace acceptance in practice, there is still confusion and debate about the size effect. We examine many claims about the size effect and aim to clarify some of the misunderstanding surrounding it by performing simple tests using publicly available data.

Keywords: Size, Size effect, Size anomaly, Small Cap, Microcap, Market efficiency, Illiquidity, January effect

JEL Classification: G11, G12

Suggested Citation

Alquist, Ron and Israel, Ronen and Moskowitz, Tobias J., Fact, Fiction, and the Size Effect (May 12, 2018). Available at SSRN: https://ssrn.com/abstract=3177539 or http://dx.doi.org/10.2139/ssrn.3177539

Ron Alquist (Contact Author)

AQR Capital Management LLC ( email )

Greenwich Plaza
Greenwich, CT NY 06830
United States

Ronen Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Tobias J. Moskowitz

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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