Does Market Risk Really Explain the Size Effect?

Narasimhan Jegadeesh

Journal of Financial and Quantitative Analysis, 1992, vol. 27, issue 3, 337-351

Abstract: This paper critically evaluates the claim in recent papers that precisely estimated betas explain the cross-sectional differences in expected returns across size-based portfolios. In these studies, the correlations between firm size and betas across the test portfolios are close to one in magnitude, yielding potentially spurious inferences. This paper shows that when the test portfolios are constructed so that the correlations between firm size and beta are small, the betas explain virtually none of the cross-sectional differences in portfolio returns.

Date: 1992
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