19th Century Test of the Size and Value Factors

Are the size effect and the value premium peculiar to 20th century markets, or are they enduring characteristics of equity market behavior? In the January 2009 preliminary version of their paper entitled “The Asset Pricing Anomalies in 19th Century Britain”, Qing Ye, Charles Hickson and John Turner measure the size and value anomalies using an original 19th century dataset. Using monthly stock prices and annual dividends for 1,051 stocks traded on the London Stock Exchange during March 1825 to December 1870, they conclude that:

• Small-capitalization stocks deliver significantly higher returns than large-capitalization stocks. After correcting for delisting bias, the size effect across the entire sample period exceeds 1% per month. Neither market risk (beta) nor liquidity effects fully explain the outperformance of small stocks.
• Value stocks (as defined by high dividend yield, since book-to-market ratios are generally unavailable) outperform growth stocks. The monthly value premium across the entire sample period, adjusted for market risk, is in the range 2%-4%.
• The size effect and value premium are substantially independent.
• Since the size effect and the value premium existed long before their discovery, they may be pervasive aspects of equity markets.

In summary, evidence from this 19th century test supports belief in the persistence of the size effect and the value premium for equities.

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