The size premium as a lottery

McGee, Richard J. ; Olmo, José

Resumen: 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.

Idioma: Inglés

DOI: 10.1080/1351847X.2019.1644360

Año: 2021

Publicado en: EUROPEAN JOURNAL OF FINANCE 27, 1-2 (2021), 158-177
ISSN: 1351-847X

Factor impacto JCR: 1.903 (2021)

Categ. JCR: BUSINESS, FINANCE rank: 78 / 111 = 0.703 (2021) - Q3 - T3

Factor impacto CITESCORE: 3.0 - Economics, Econometrics and Finance (Q2)

Factor impacto SCIMAGO: 0.578 - Economics, Econometrics and Finance (miscellaneous) (Q1)

Tipo y forma: Article (PostPrint)