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Size Matters Everywhere: Decomposing the Small Country and Small Industry Premia

Last Updated on 10 February, 2024 by Rejaul Karim

In the intricate tapestry of financial markets, Adam Zaremba and Mehmet Umutlu unravel the mysteries of size effects in their forthcoming contribution, “Size Matters Everywhere: Decomposing the Small Country and Small Industry Premia.”

Across 67 pages, they embark on a journey through 51 equity markets from 1973 to 2017, meticulously dissecting market value into short-term returns, long-run returns, composite issuance, and lagged market value. Their findings extend beyond confirming the pervasive size effect across countries to unveiling a striking industry size effect, where small industries outshine their larger counterparts.

The duo delves into the intricate web of components shaping market value, unraveling the drivers behind country and industry size premia, with a nuanced exploration of long-run reversal and lagged market value. As financial landscapes evolve, Zaremba and Umutlu offer insights into the vanishing small country effect and illuminate the complexities of asset pricing and return predictability.

Abstract Of Paper

We explore the country and industry size effects by decomposing market value into four components: short-term return, representing momentum; long-run return, representing reversal; composite issuance; and lagged market value. We examine the implications of this decomposition for the country and industry size premia within a sample of 51 equity markets for the years 1973–2017. We confirm a significant size effect across countries and uncover an industry size effect: small industries markedly outperform large industries. While the cross-sectional dispersion in market value is determined almost exclusively by the lagged market value component, the country and industry size premia have two primary drivers: lagged market value and long-run reversal. Our analysis also discovers an industry issuance effect and a remarkable January effect in both country and industry returns. Finally, we also shed some light on the vanishing small country effect in the last decade.

Original paper – Download PDF

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Author

Adam Zaremba
Montpellier Business School; Poznan University of Economics and Business

Mehmet Umutlu
Edinburgh Napier University, The Business School, Accounting and Finance Subject Group

Conclusion

In conclusion, the examination of country and industry size effects offers a nuanced perspective by deconstructing market value into distinct components. This meticulous dissection, encompassing short-term return, long-run return, composite issuance, and lagged market value, unveils compelling insights into size premia across 51 equity markets spanning 1973–2017.

The affirmation of a significant size effect across countries and the revelation of the outperformance of small industries contribute to our understanding of asset pricing dynamics. The intricate interplay of lagged market value and long-run reversal emerges as the primary driver behind country and industry size premia.

Additionally, the findings shed light on industry issuance effects and a noteworthy January effect in both country and industry returns. Lastly, valuable insights are provided into the evolving landscape, addressing the observed vanishing small country effect in the last decade.

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FAQ

Q1: What is the main focus of the paper “Size Matters Everywhere: Decomposing the Small Country and Small Industry Premia” by Adam Zaremba and Mehmet Umutlu?

The paper focuses on exploring and dissecting the country and industry size effects in financial markets. The authors decompose market value into four components—short-term return, long-run return, composite issuance, and lagged market value—to uncover the drivers behind size premia across 51 equity markets from 1973 to 2017.

Q2: What are the key findings regarding size effects in the paper?

The study confirms a significant size effect across countries and introduces a notable industry size effect, revealing that small industries tend to outperform large industries. The cross-sectional dispersion in market value is primarily determined by the lagged market value component, while the country and industry size premia are influenced by lagged market value and long-run reversal.

Q3: What additional insights does the paper provide, and how does it address the evolving financial landscape?

The paper offers insights into industry issuance effects and a January effect in both country and industry returns. It also addresses the observed vanishing small country effect in the last decade, providing valuable perspectives on the changing dynamics of size effects in financial markets.

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