The size premium as a lottery
The size premium as a lottery
We investigate empirically the dependence of the size effect on the top performing stocks in a cross-section of risky assets separated by industry. We propose a test for a lottery-style factor payoff based on a stochastic utility model for an under-diversified investor. The associated conditional logit model is used to rank different investment portfolios based on size and we assess the robustness of the ranking to the inclusion/exclusion of the best performing stocks in the cross-section. Our results show that the size premium has a lottery-style payoff and is spurious for most industries once we remove the single best returning stock in an industry from the sample each month. Analysis in an asset pricing framework shows that standard asset pricing models fail to correctly specify the size premium on risky assets when industry winners are excluded from the construction of the size factor. Our findings have implications for stock picking, investment management and risk factor analysis.
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Mcgee, Richard J.
93f5c00c-a866-4e35-997e-60b817f40497
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Mcgee, Richard J.
93f5c00c-a866-4e35-997e-60b817f40497
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Abstract
We investigate empirically the dependence of the size effect on the top performing stocks in a cross-section of risky assets separated by industry. We propose a test for a lottery-style factor payoff based on a stochastic utility model for an under-diversified investor. The associated conditional logit model is used to rank different investment portfolios based on size and we assess the robustness of the ranking to the inclusion/exclusion of the best performing stocks in the cross-section. Our results show that the size premium has a lottery-style payoff and is spurious for most industries once we remove the single best returning stock in an industry from the sample each month. Analysis in an asset pricing framework shows that standard asset pricing models fail to correctly specify the size premium on risky assets when industry winners are excluded from the construction of the size factor. Our findings have implications for stock picking, investment management and risk factor analysis.
Text
Sizepremium_McGee_Olmo
- Accepted Manuscript
More information
Accepted/In Press date: 9 July 2019
e-pub ahead of print date: 22 July 2019
Identifiers
Local EPrints ID: 433018
URI: http://eprints.soton.ac.uk/id/eprint/433018
ISSN: 1351-847X
PURE UUID: adeb82e9-f978-4ec3-9029-c622c14be862
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Date deposited: 06 Aug 2019 16:30
Last modified: 16 Mar 2024 08:04
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Author:
Richard J. Mcgee
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