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Does Market Risk Really Explain the Size Effect?

Published online by Cambridge University Press:  06 April 2009

Narasimhan Jegadeesh
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Abstract

This paper critically evaluates the claim in recent papers that precisely estimated betas explain the cross-sectional differences in expected returns across size-based portfolios. In these studies, the correlations between firm size and betas across the test portfolios are close to one in magnitude, yielding potentially spurious inferences. This paper shows that when the test portfolios are constructed so that the correlations between firm size and beta are small, the betas explain virtually none of the cross-sectional differences in portfolio returns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 3 , September 1992 , pp. 337 - 351
Copyright
Copyright © School of Business Administration, University of Washington 1992

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