Working Paper: CEPR ID: DP12684
Authors: Clifford S. Asness; Andrea Frazzini; Ronen Israel; Lasse Heje Pedersen
Abstract: The size premium has been challenged along many fronts: it has a weak historical record, varies significantly over time, in particular weakening after its discovery in the early 1980s, is concentrated among microcap stocks, predominantly resides in January, is not present for measures of size that do not rely on market prices, is weak internationally, and is subsumed by proxies for illiquidity. We find, however, that these challenges are dismantled when controlling for the quality, or the inverse “junk”, of a firm. A significant size premium emerges, which is stable through time, robust to the specification, more consistent across seasons and markets, not concentrated in microcaps, robust to non-price based measures of size, and not captured by an illiquidity premium. Controlling for quality/junk also explains interactions between size and other return characteristics such as value and momentum.
Keywords: size; size effect; size anomaly; small cap; microcap; quality; junk
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Quality (L15) | Size Premium (D49) |
| Size Premium (D49) | Stability Over Time (C62) |
| Quality (L15) | Sensitivity to Liquidity Measures (E41) |
| Size Premium (D49) | Presence Across Firms (L19) |
| Quality (L15) | Understanding Interaction with Other Factors (C39) |
| Size Premium (D49) | International Presence (F53) |