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Is size a priced factor in Germany?

Is size a priced factor in Germany?. Presented by : Wen Huang Savang Kittikhoun Kim-Tuan Nguyen Yong Yao Tianxue Zhang. Introduction. CAPM : Excess return = ß * market premium Empirical studies show that stock price not fully explained by CAPM Returns of small firms turn out higher

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Is size a priced factor in Germany?

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  1. Is size a priced factor in Germany? Presented by : Wen Huang Savang Kittikhoun Kim-Tuan Nguyen Yong Yao Tianxue Zhang

  2. Introduction • CAPM : • Excess return = ß * market premium • Empirical studies show that stock price not fully explained by CAPM • Returns of small firms turn out higher • Returns of big firms turn out lower

  3. Introduction Does the size of a firm affect its return ?

  4. Methodology • Excess return = ß * market premium + ?? • Period of analysis : Jan 1991 to Dec 2000 • Randomly pick 200 out of 800 firms • Sort by size (market capitalization) • Group in 10 portfolios of 20 firms each • Re-balance portfolio every year

  5. Attribute portfolio Quintiles

  6. Attribute Portfolio - Graph

  7. Regression • Construction of a factor-mimicking spread portfolio • Small minus Big (SMB) • Returns of smallest 30% - returns of biggest 30% • Spread portfolio has no market risk

  8. Regression - cont’d • rnt = n+ nm rmt + nA SMBt+ unt • Where: • rnt : average excess return • n : intercept; • rmt : excess return of German market index • nm : market beta of portfolio n • SMBt : return of spread portfolio • nA : sensitivity beta of the return of portfolio n to this size attribute • unt : the error term

  9. Regression results

  10. Regression results - Graph

  11. Another test • rnt = 0t+ mtnm + 1tnA + 2t An + vnt • nm , nA taken from previous regression • An is the log (base 10) of the size of the firm • If 1t significant, but 2t not significant : • > nA fully captures the attribute induced risk

  12. We cannot conclude that nA fully captures the risk induced attribute Regression results...

  13. Sensitivity analysis - SMB • Variation of returns of SMB could change nA substantially • Independance International Associates (IIA) • Set of 5 portfolios for each country • Covers 75% of market capitalisation • Big cap portfolio : 70% of total market cap • Small cap portfolio : 30% of total market cap • Repeat time series analysis

  14. Results

  15. Sensitivity analysis - SMB

  16. Sensitivity Analysis - Time • Divide our samples into two sub-periods : • January 1991 to December 1995 • January 1996 to December 2000 • Purpose of check : • Does the correlation between portfolio returns and the two risk factors time dependent ?

  17. Regression Results

  18. Conclusion • Our work provides evidence that : • Larger firms have lower returns • Smaller firms have higher returns • We encountered a few inconclusive results • May require larger sample • Return could depend on other attributes • Our model : • concurs with empirical observations • Still incomplete

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