This paper shows the existence of the size effect in the cryptocurrency market. The size effect is a market phenomenon observed in the stock market in which smaller assets outperform larger assets. Recent literature has revealed the size effect in other financial markets as well. In order to explain the size effect, this paper proposes a general quantitative theory that supports its existence in any financial markets under specific conditions. Furthermore, the paper tests for the size effect in the cryptocurrency market using daily price data from April 2013 to April 2018. The paper finds a statistically significant size effect across the cryptocurrency market during the sample period. In the process, we test a profitable pair-trading strategy that involves opening a short position on the higher rank (larger assets) and opening a long position on the lower rank (smaller assets) of the cryptocurrency market. Based on our findings, we discuss the implications on modern finance, specifically on the subjects of Efficient Market Hypothesis and asset pricing models.

This dissertation consists of two chapters. The first chapter shows that the measurement errors in betas for stocks induce corresponding measurement errors in alphas and a spurious negative covariance between the estimated betas and alphas across stocks. This negative covariance between the estimated betas and alphas results in a violation of the independence assumption between the independent variable (betas) and error terms in the Fama-MacBeth regressions of tests of the CAPM, thereby creating a downward bias in the estimated market risk premiums. The procedure of using portfolio returns and betas does not necessarily eliminate this bias. Depending upon the grouping variable used to form portfolios, the negative covariance between estimated betas and alphas can be increased, decreased, and can even be made positive. This paper proposes two methods for correcting the downward bias in the estimated market risk premium. The estimated market risk premiums are consistent with the CAPM after the proposed corrections. The second chapter provides evidence that when the ex-post market risk premium is positive (up markets), the relation between returns and betas is positive, significant, and consistent with the CAPM. However, when the ex-post market risk premium is negative (down markets), the negative relation between betas and returns is significant, but stronger than what is implied by the CAPM. This strong negative relation offsets the positive relation, resulting in an insignificant relation between returns and betas for the overall period. The negative relation between size and returns, after controlling for beta differences, is present only when the ex-post market risk premium is negative, and is responsible for the negative relation for the overall period. This paper decomposes the negative relation between size and returns after controlling for beta differences into the intercept size effect (relation between alphas of stocks and their size) and the residual size effect (relation between residuals of stocks and their size). The asymmetrical size effect between up and down market is being driven by the residual size effect. Long term mean reversion in returns explains, in part, the negative relation between size and returns during down markets. / Ph. D.

價值股與小型股在90年代的表現不如預期，顯示這些股票風格並不能帶給投資人過去文獻所顯現的報酬。近年來，有關風格擇時策略的研究開始興起，在美國、英國、日本皆發現了相當可觀的潛在報酬。此篇論文的目的，是要檢驗風格輪動策略在台灣股票市場的執行效果，以對國外的風格投資實證結果做延伸應用。首先，此篇論文探討風格輪動策略的潛在利益。接著，建立模型預測未來風格溢酬，並與消極策略比較績效結果。這裡使用的預測模型，調整自Bauer et al. (2004)所使用的動態模型方法，並增加適合度統計量的選擇條件，以確保模型估計期間內解釋變數的解釋力，最後選出在樣本外24個月中預測力最高的模型作為下一期的預測模型。實證結果顯示，風格輪動策略在台灣股票市場具有相當顯著的潛在報酬。在大型/小型輪動策略中，預測模型表現明顯比消極策略優秀，但在價值/成長輪動策略中，預測模型並沒有辦法顯著超越消極策略。而多重風格投資策略可以帶來更高的報酬，同時也涉及更高的風險。因為規模風格消極策略在樣本期間表現不佳，使得大型/小型輪動策略可以藉由預測模型打敗消極策略。然而，雖然價值/成長輪動策略的潛在利益頗大，但價值風格消極策略在樣本期間表現不俗，使得本篇論文的預測模型不易勝過消極策略。 / The disappointing performance of style consistency strategies during 1990s told us that value and small-cap stocks may not bring us the same returns as literature showed. Recently, researchers of style timing strategies have found a great potential benefit. The aim of this paper attempts to examine the execution of the style rotation strategies in Taiwan stock market and contribute to more extensive application of international style investment empirical results. First, this paper explores the potential benefits of the style rotation strategies. Then, the paper tries to predict the style premiums and compares the style rotation results to the passive strategies. Adjusting the dynamic modeling approach applied by Bauer et al. (2004), this paper adds the selection criteria of the likelihood score statistic to assure the in-sample explanatory power of 17 financial and economic variables, and chooses the forecast models with the highest out-of-sample forecasting power in the training period. The results show that the potential benefits of style rotation strategies were significant and worth researching in Taiwan stock market. The forecast models performed well in the small/large rotation strategies, but worse in the value/growth rotation strategies. The multi-style rotation strategy could provide higher return as well as involved higher risk. Because the small/large passive strategy performed poorly during the investment period, the size rotation strategy could beat the passive strategy through the forecast model. However, although the potential benefit of the value/growth rotation strategy was still large in the sample period, it was challenging to beat the passive value/growth strategy when the value/growth passive strategy performed well.

[pt] Esta dissertação busca replicar, para o mercado brasileiro, a abordagem e as metodologias utilizadas por Asness, Frazzini e Perdersen (2015) na tentativa de verificar a existência de prêmio positivo entre os retornos de firmas pequenas e firmas grandes no mercado norte-americano. Adicionalmente, procura mensurar como o fator Qualidade entre outros, poderiam influenciar no resultado desse prêmio, otimizando-o ou não de acordo com o controle para tais variáveis. O trabalho se pauta no modelo clássico de precificação de Fama e French, tanto para definir o fator que representará o prêmio por tamanho como para a criação de diversos portfólios que resultam nos outros fatores a serem considerados nas regressões de cada estudo. / [en] This paper seeks to replicate, for the Brazilian market, the approach and methodologies used by Asness, Frazzini and Perdersen (2015) in an attempt to verify the existence of a positive premium among the returns of small firms and large firms in the North American market. In addition, it seeks to measure how the Quality factor, among others, could influence the results of this premium, optimizing it or not according to the control for such variables. The paper is based on the classic Fama and French pricing model, both to define the factor that will represent the size premium and creation of several portfolios that result in the other factors to be considered in the regressions of each study.

This thesis examines asset pricing and capital structure of small- and medium-sized enterprises (SMEs) in three essays. Firm finance and asset pricing are areas of voluminous research in the literature. Most of this research observes firms trading on public stock exchanges. In my thesis, I examine privately-owned SMEs where relatively little research has been done. I use a proprietary database of over 16,000 SMEs that sold from 1990 to 2010, reporting market valuations and accounting information. My findings contribute to the literature on asset pricing and capital structure of private firms that benefits researchers, entrepreneurs, investors, and analysts. The first essay examines whether the size effect in returns found in traded stocks is present in SMEs. The size-effect literature generally observes listed firms and finds that smaller firms tend to have higher returns. Using the SME database, I document the size effect in private firms using market valuations. I also find the size premium is concentrated in smaller SMEs. In firms smaller than $2.5 million in market value, the size effect is nearly 13 times stronger compared to larger firms. The second essay explores the effects of investor sentiment and marketwide liquidity in SME returns. Prior studies find these factors have effects in returns of listed firms. I find that SME returns are negatively related to sentiment and liquidity. As sentiment or liquidity rise, SME returns tend to fall. This study also finds that the effects of sentiment and liquidity are concentrated in smaller firms and weaken or disappear in larger SMEs. Apparently investors in smaller SMEs are more influenced by sentiment and liquidity. I also find that sentiment and liquidity have conditional effects on the magnitude of the size premium. The third and final essay examines SME capital structure. Firm capital structure has been one of the most contentious issues in finance theory for over 50 years. Relatively little research examines private firm finance and no previous studies to my knowledge have examined SME capital structure using market-based leverage ratios. I examine relations between leverage and capital structure determinants suggested by theory using market-based and book-value leverage ratios. I find support for both the trade-off and pecking-order theories. This study also finds that SMEs tend to use short-term debt much more than long-term debt and firms appear to practice maturity matching where managers tend to match borrowing terms with asset life. Evidence also suggests that capital structure determinants suggested by theory have greater explanatory power for market-based leverage ratios than for ratios based on book values.

Abstract This dissertation contributes to the understanding of investor behavior by using personality traits to help explain investor decision-making. The work is novel, as personality traits have not been used much in finance research. The data used in this dissertation is also new to the field, consisting of observations on personality traits and socioeconomic variables combined with official records of investors’ stockholdings. The first essay provides evidence that personality traits significantly affect the stock market participation decision. The essay shows that subscales of traits (i.e., lower-level traits or facets) can provide a better model of behavior, with some subscales of a single higher-level trait having opposite effects on behavior. The novelty seeking subscales exploratory excitability and extravagance have positive and negative effects, respectively, and the reward dependence subscales dependence and sentimentality have positive and negative effects, respectively. The magnitudes of the effects are large, with marginal effects on the probability of being a stock market participant of up to four percentage points. The second essay explores the relationship between personality traits and risk aversion. We estimate risk aversion from equity holdings and from survey measures. The traits display a distinctive pattern of correlations with the estimates of risk aversion. Some traits are significantly related to observed portfolio characteristics such as portfolio volatility, number of stocks held, and trading frequency. The pattern of the traits’ relationships with the various measures of risk aversion indicates that personality traits should not be considered as merely drivers of risk aversion but as preference parameters distinct from risk aversion. The third essay shows that personality traits are related to an investor’s preferences for value versus growth stocks and for small capitalization stocks versus large capitalization stocks. We find more extravagant individuals favor large capitalization growth stocks; more impulsive people favor small capitalization growth stocks; more sentimental investors prefer small capitalization value stocks; and more social investors prefer small capitalization stocks with a tilt towards value. / Tiivistelmä Tämä tutkimus auttaa ymmärtämään sijoituskäyttäytymistä selittämällä sijoittajien päätöksentekoa heidän luonteenpiirteillään. Tutkimustuloksilla on uutuusarvoa, sillä luonteenpiirteiden merkitystä ei ole juurikaan tutkittu rahoitustutkimuksessa. Tutkimusaineisto on sekin luonteeltaan tavanomaisesta poikkeava, koostuen yksityishenkilöiden luonteenpiirteitä ja sosioekonomista asemaa kuvaavista muuttujista sekä heidän osakeomistustaan koskevista virallisista rekisteritiedoista. Tutkimuksen ensimmäinen essee osoittaa, että luonteenpiirteillä on merkittävä vaikutus yksityishenkilön päätökseen toimia osakemarkkinoilla. Tutkimustulosten mukaan osallistumispäätöstä kyetään ennustamaan paremmin käyttämällä luonteenpiirteiden pääluokkia mittaavien muuttujien sijasta luonteenpiirteiden alaluokkia mittaavia muuttujia. Tämä selittyy sillä, että alaluokkia mittaavilla muuttujilla on eräissä tapauksissa vastakkaismerkkisiä, pääluokkaa mittaavassa muuttujassa toisensa peittäviä, yhteyksiä osallistumispäätökseen. Tämä voidaan havaita muun muassa pääluokkaan ”elämyshakuisuus” kuuluvien ”kokeilunhalun” (+) ja ”tuhlaavaisuuden” (-) kohdalla, samoin kuin pääluokkaan ”palkkioriippuvuus” kuuvilla ”riippuvuudella” (+) ja ”sentimentaalisuudella” (-). Kaiken kaikkiaan luonteenpirteitä mittaavien muuttujien vaikutuksen suurusluokka on korkea, vastaten yksittäisen muuttujan kohdalla jopa neljän prosentin marginaalivaikutusta osakemarkkinoille osallistumisen todennäköisyyteen. Toinen essee tarkastelee luonteenpiirteiden ja riskinkarttamisen asteen välistä yhteyttä. Tutkimuksessa mitataan yksityishenkilön riskinkarttamisen astetta toisaalta hänen osakeomistuksensa rakenteen perusteella ja toisaalta kyselytutkimuksen avulla. Sijoittajien luonteenpiirteiden ja muodostettujen riskinkarttamisen astetta mittaavien muuttujien väliset korrelaatiot muodostavat selkeän rakenteen. Eräät luonteenpiirteet ovat merkitsevässä riippuvuussuhteessa muun muassa sijoittajan osakesalkun volatiliteettiin, salkkuun sisällytettyjen osakesarjojen määrään ja sijoittajan kaupankäyntiaktiivisuuteen. Luonteenpiirteitä kuvaavien muuttujien ja riskinkarttamisastetta kuvaavien muuttujien välisen yhteyden perusteella luonteenpiirteitä tulisi tarkastella enneminkin erillisinä sijoittajien preferenssejä kuvaavina muuttujina kuin riskinkarttamisasteen taustalla olevina perustekijöinä. Kolmas essee osoittaa, että luonteenpiirteet ovat yhteydessä siihen, suosiiko sijoittaja arvo- vs. kasvuosakkeita ja/tai alhaisen markkina-arvon vs. korkean markkina-arvon yhtiöiden osakkeita. Tutkimustulokset osoittavat, että ”tuhlaavammat” sijoittajat suosivat korkean markkina-arvon omaavia kasvuosakkeita, kun taas ”impulsiivisemmat” sijoittajat suosivat alhaisen markkina-arvon omaavia kasvuosakkeita. Vastaavasti ”sentimentaalisemmat” sijoittajat suosivat ylipäätään alhaisen markkina-arvon omaavia arvo-osakkeita, ”sosiaalisten” sijoittajien suosiessa heidänkin alhaista markkina-arvoa, suunnaten kiinnostustaan samalla arvo-osakkeisiin.

<p>The cross-sectional variation of stock returns used to be described by the Capital Asset Pricing Model until the early 90‟s. Anomalies, such as, book-to-market effect and small firm effect undermined CAPM‟s ability to explain stock returns and Fama & French (1992) have shown that simple firm attributes, like, firm size and book-to-market value can explain the returns far better than Beta. Following Fama & French many other researchers examine the explanatory powers of CAPM and other asset pricing models. However, most of those studies use US data. There are some researches done in different countries than US, however more out-of-sample studies need to be conducted.</p><p>To our knowledge there are very few studies using the Swedish data and this thesis contributes to that small pool of studies. Moreover, the studies testing the CAPM use the unconditional version of the model. There are some papers suggesting the use of a conditional CAPM that would exhibit better explanatory powers than the unconditional CAPM. Different ways of conditioning the CAPM have been proposed, but one that we think is the least complex and possible to make use of in the business world is the dual-beta model. This conditional CAPM assumes a different relationship between beta and stock returns during the up markets and down markets. Furthermore, the model has not thoroughly been tested outside the US. Our study is the first to use the dual-beta model in Sweden. In addition, the momentum effect has lately been given some attention and Fama & French‟s (1993) three factor model has not been able to explain the abnormal returns related to that anomaly. We test the Fama & French three factor model, CAPM and Carhart‟s four factor model‟s explanatory abilities of the momentum effect using Swedish stock returns. Ultimately, our aim is to find the best model that describes stock return cross-section on the Stockholm Stock Exchange.</p><p>We use returns of all the non-financial firms listed on Stockholm Stock Exchange between September, 1997 and April, 2010. The number of companies included in our time sample is 366. The results of our tests indicate that the small firm effect, book-to-market effect and the momentum effect are not present on the Stockholm Stock Exchange. Consequently, the CAPM emerges as the one model that explains stock return cross-section better than the other models suggesting that Beta is still a proper measure of risk. Furthermore, the conditional version of CAPM describes the stock return variation far better than the unconditional CAPM. This implies using different Betas to estimate risk during up market conditions and down market conditions.</p>

The cross-sectional variation of stock returns used to be described by the Capital Asset Pricing Model until the early 90‟s. Anomalies, such as, book-to-market effect and small firm effect undermined CAPM‟s ability to explain stock returns and Fama &amp; French (1992) have shown that simple firm attributes, like, firm size and book-to-market value can explain the returns far better than Beta. Following Fama &amp; French many other researchers examine the explanatory powers of CAPM and other asset pricing models. However, most of those studies use US data. There are some researches done in different countries than US, however more out-of-sample studies need to be conducted. To our knowledge there are very few studies using the Swedish data and this thesis contributes to that small pool of studies. Moreover, the studies testing the CAPM use the unconditional version of the model. There are some papers suggesting the use of a conditional CAPM that would exhibit better explanatory powers than the unconditional CAPM. Different ways of conditioning the CAPM have been proposed, but one that we think is the least complex and possible to make use of in the business world is the dual-beta model. This conditional CAPM assumes a different relationship between beta and stock returns during the up markets and down markets. Furthermore, the model has not thoroughly been tested outside the US. Our study is the first to use the dual-beta model in Sweden. In addition, the momentum effect has lately been given some attention and Fama &amp; French‟s (1993) three factor model has not been able to explain the abnormal returns related to that anomaly. We test the Fama &amp; French three factor model, CAPM and Carhart‟s four factor model‟s explanatory abilities of the momentum effect using Swedish stock returns. Ultimately, our aim is to find the best model that describes stock return cross-section on the Stockholm Stock Exchange. We use returns of all the non-financial firms listed on Stockholm Stock Exchange between September, 1997 and April, 2010. The number of companies included in our time sample is 366. The results of our tests indicate that the small firm effect, book-to-market effect and the momentum effect are not present on the Stockholm Stock Exchange. Consequently, the CAPM emerges as the one model that explains stock return cross-section better than the other models suggesting that Beta is still a proper measure of risk. Furthermore, the conditional version of CAPM describes the stock return variation far better than the unconditional CAPM. This implies using different Betas to estimate risk during up market conditions and down market conditions.