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Size as Catalyst for Value and Momentum

| | Posted in: Momentum Investing, Size Effect, Value Premium

The conventional size (market capitalization) premium is notoriously weak since discovery almost 40 years ago. Does this poor live track record mean it is useless to investors? In their September 2020 paper entitled "Settling the Size Matter", David Blitz and Matthias Hanauer examine whether the size premium is exploitable as a standalone anomaly or in combination with other anomalies. They consider six versions of a size factor from prior research, as follows:

  1. Adjusted for value - average of three small-cap stock portfolios minus average of three big-cap stock portfolios after sorting for book-to-market ratio.
  2. Adjusted for value, investment and profitability - average of nine small-cap stock portfolios minus average of nine big-cap stock portfolios after separately sorting on the other three factors.
  3. Adjusted for profitability - average of three small-cap stock portfolios minus average of three big-cap stock portfolios after sorting for profitability.
  4. Adjusted for quality - average of three small-cap stock portfolios minus average of three big-cap stock portfolios after sorting for quality.
  5. Adjusted for quality beta - average of three small-cap stock portfolios minus average of three big-cap stock portfolios after sorting for quality beta.
  6. Adjusted for size, investment and return on equity - average of nine small-cap stock portfolios minus average of nine big-cap stock portfolios after separately sorting on the other three factors.

All factor portfolio segments are capitalization-weighted, and all returns are in U.S. dollars. They consider regressions (implying long-short implementations) and long-only sides of these factors. They also consider size factor definitions that do not overweight size inputs, as do those above. Using data required by these definitions for U.S. stocks since July 1963 (or January 1967 for some inputs) and for international stocks since July 1990 (or July 1993 for some inputs), all through December 2019, they find that:

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