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The Role of Shorting, Firm Size, and Time on Market Anomalies

Last Updated on 10 February, 2024 by Rejaul Karim

The Role of Shorting, Firm Size, and Time on Market Anomalies” is a compelling research paper by Ronen Israel and Tobias J. Moskowitz that investigates the impact of short selling, company size, and time on the profitability of size, value, and momentum strategies.

The study uncovers that long positions constitute the majority of profits for size, value, and momentum strategies, the extent of which varies for each category. Moreover, short selling’s importance for momentum decreases and value increases as firm size diminishes.

The findings also reveal that the value premium shrinks with firm size, whereas momentum profits display no consistent relationship with size. These results hold true across various equity markets and asset classes and remain consistent over a long duration. Furthermore, the research suggests that trading costs and institutional and hedge fund ownership do not significantly impact returns for size, value, and momentum strategies.

Abstract Of Paper

We examine the role of shorting, firm size, and time on the profitability of size, value, and momentum strategies. We find that long positions comprise almost all of size, 60% of value, and half of momentum profits. Shorting becomes less important for momentum and more important for value as firm size decreases. The value premium decreases with firm size and is weak among the largest stocks. Momentum profits, however, exhibit no reliable relation with size. These effects are robust over 86 years of U.S. equity data and almost 40 years of data across four international equity markets and five asset classes. Variation over time and across markets of these effects is consistent with random chance. We find little evidence that size, value, and momentum returns are significantly affected by changes in trading costs or institutional and hedge fund ownership over time.

Original paper – Download PDF

Here you can download the PDF and original paper of The Role of Shorting, Firm Size, and Time on Market Anomalies.

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Author

Ronen Israel
AQR Capital Management, LLC

Tobias J. Moskowitz
Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

Conclusion

In conclusion, the research paper “The Role of Shorting, Firm Size, and Time on Market Anomalies” by Ronen Israel and Tobias J. Moskowitz provides an in-depth analysis of the complex interplay between short selling, company size, and time on the profitability of size, value, and momentum strategies.

The study reveals that the majority of profits in each strategy are driven by long positions, with short selling’s influence being variable. Furthermore, the value premium is found to decline with firm size, while momentum profits demonstrate no significant correlation with size. These observations remain consistent across various time periods, markets, and asset classes, with random variations being the primary explanation for such differences.

Importantly, the research indicates that trading costs and institutional and hedge fund ownership do not notably affect the returns of size, value, and momentum strategies. These insights contribute significantly to the understanding of market anomalies and the factors driving different investment strategies.

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FAQ

Q1: What is the primary finding regarding the profitability of size, value, and momentum strategies in relation to long and short positions?

The research finds that long positions constitute the majority of profits for size, value, and momentum strategies. Specifically, almost all profits from size, 60% of profits from value, and half of profits from momentum are driven by long positions. This highlights the significance of taking long positions for these strategies.

Q2: How does the importance of short selling vary across size, value, and momentum strategies, particularly concerning firm size?

Short selling becomes less important for momentum and more important for value as firm size decreases. The influence of short selling on strategy profitability is variable and is linked to the size of the companies involved. The findings suggest that short selling plays a diminishing role in momentum profits and an increasing role in value profits as firm size diminishes.

Q3: What are the observed trends regarding the value premium and momentum profits concerning firm size?

The value premium, associated with the profitability of value strategies, decreases with firm size and is notably weak among the largest stocks. In contrast, momentum profits exhibit no consistent relationship with firm size. This suggests that the impact of firm size on strategy returns varies across value and momentum strategies.

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