TY - JOUR
T1 - Shrinking the Size Effect
AU - Levy, Moshe
N1 - Publisher Copyright:
© 2024 With Intelligence LLC.
PY - 2024
Y1 - 2024
N2 - Harry Markowitz laid the mean-variance foundation for the cornerstone capital asset pricing model (CAPM). One of the most significant and persistent empirical violations of the CAPM is the size, or small-firm, effect: the average returns of small firms are much too high relative to their betas. However, the CAPM risk-return relationship should hold for the expected parameters, and statistical theory tells us that the sample parameters are not the best estimates of the ex-ante parameters. When Bayesian shrinkage is employed to the sample average returns and betas, the size effect almost completely disappears.
AB - Harry Markowitz laid the mean-variance foundation for the cornerstone capital asset pricing model (CAPM). One of the most significant and persistent empirical violations of the CAPM is the size, or small-firm, effect: the average returns of small firms are much too high relative to their betas. However, the CAPM risk-return relationship should hold for the expected parameters, and statistical theory tells us that the sample parameters are not the best estimates of the ex-ante parameters. When Bayesian shrinkage is employed to the sample average returns and betas, the size effect almost completely disappears.
UR - http://www.scopus.com/inward/record.url?scp=85198230643&partnerID=8YFLogxK
U2 - 10.3905/jpm.2024.50.8.240
DO - 10.3905/jpm.2024.50.8.240
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AN - SCOPUS:85198230643
SN - 0095-4918
VL - 50
SP - 240
EP - 249
JO - Journal of Portfolio Management
JF - Journal of Portfolio Management
IS - 8
ER -