The smallest stocks are not just smaller: US and international evidence

Lieven De Moor () and Piet Sercu ()
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Lieven De Moor: Hogeschool-Universiteit Brussel (HUB), Belgium
Piet Sercu: K.U. Leuven, Faculty of Business and Economics, Research Center of International Finance and Louvain School of Management, Department of Finance

No 2011/28, Working Papers from Hogeschool-Universiteit Brussel, Faculteit Economie en Management

Abstract: Using an international Thomson Reuters Datastream database where size coverage is unusually wide and data errors have been reduced to a low level, we show that some specification decisions, and especially those related to size, may have a significant impact on asset pricing test results. We also show that, in data with wider coverage with respect to size, the Fama-French factor portfolios need to be adjusted and their number increased. Specifically, (i) standard asset pricing models leave pricing errors for the ten percent smallest stocks, and (ii) two additional risk factors (i.e. one micro-stock factor and one extreme book-to- market factor) are needed to capture this mispricing. This holds both in US and international data. Further research is needed to measure the separate relevance of the possible economic interpretations and to identify more economic explanations for the additional risks associated with the smallest stocks.

Keywords: small firm; CAPM; SMB; HML; WML; momentum; distress; Fama; French; pricing error (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Pages: 22 page
Date: 2011-09
New Economics Papers: this item is included in nep-ent and nep-fmk
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