<p>This study deals with one of the efficient market hypothesis’ anomaly. The research aims at proving the</p><p>existence of a size anomaly by answering the question: can you outperform the market by investing in</p><p>small and mid caps? It is in fact a questioning of the well-know efficient market hypothesis (EMH). We</p><p>investigate the size effect in the situation of a passive strategy with different indices (Russell Indices and</p><p>S&P Indices) from 1995 to 2005.</p><p>The introduction gives to the reader the background he needs to understand the methodology and the</p><p>approach of the issue by the authors. Key concepts are defined such as EMH, passive strategy.</p><p>The second part exposes the methodology the authors choose and the methodology of exploited indices.</p><p>The research consist on measuring the risk adjusting excess returns by comparing the market index</p><p>return (S&P 500 or Russell 3000) and the Small and Mid Caps indices (S&P Small Cap 600, S&P Mid</p><p>Cap 400, Russell Mid Cap and Russell 2000) over the period. Indeed the methodology of indices is</p><p>exposing in details to understand in which extent the study can be influence by the construction of</p><p>indices.</p><p>Then in part 3 the authors describe theories that are possible explanations for the size effect. Then it is</p><p>understandable that the size anomaly is the result of a set of factors that generate abnormal returns.</p><p>These theories help the authors to come up with a model that gives an overview of the research.</p><p>After having explained their research method and reveal their empirical findings. The authors</p><p>demonstrate that excess returns can be earned by investing in small and mid caps indices even after</p><p>controlling for risk. The risk adjusting excess returns their findings can potentially be explained by the</p><p>other factors depicted in the theoretical part. E/P ratios, Trading Costs, January effect, Overreaction are</p><p>possible reasons to explain the size anomaly. They also find an instability and/or reversal of the size</p><p>effect consistent with one of the theories. However the authors find data with non statistic significance,</p><p>so I accept the null hypothesis that the excess returns of small and mid caps indices are equal to zero.</p><p>The paper ends with a discussion about the limitations of the study and possible further researches. The</p><p>authors conclude that even if the existence of a size effect is obvious for some years and horizons of</p><p>investment, the passive strategy appears to be an unsuited method to take advantage of the small effect</p><p>since the results reject the null hypothesis. The authors clarify the fact that before investing in small and</p><p>mid caps, one has to be aware of all the factors that can influence his investment (beside risk) because</p><p>the size effect is a set of factors.</p><p>Key words: Efficient Market Hypothesis, Abnormal returns, Size effect (anomaly), Passive strategy,</p><p>Market Index, S&P indices, Russell indices</p>
| Identifer | oai:union.ndltd.org:UPSALLA/oai:DiVA.org:umu-1233 |
| Date | January 2007 |
| Creators | Trembleau, Mathieu, Hiodo, Gustavo |
| Publisher | Umeå University, Umeå School of Business, Umeå University, Umeå School of Business, Umeå : Handelshögskolan vid Umeå universitet |
| Source Sets | DiVA Archive at Upsalla University |
| Language | English |
| Detected Language | English |
| Type | Student thesis, text |
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