Size and Value Anomalies
In this chapter, we consider the size and value anomalies. We first provide a brief overview of both anomalies and summarize the initial evidence for them. In particular, we describe how they contributed to the development of the Fama-French three-factor model, one of the most recognized risk models. There is still no consensus in the literature about whether the value premium represents a compensation for some risk or should be attributed to mispricing, and we present the main arguments in this continuing debate. Next, we discuss the cross-sectional and time-series variation in the magnitude of the value premium. A better understanding of such variations may cast new light on the origin of the value anomaly as well as improve the performance of investment strategies that seek to exploit the anomaly. We continue this chapter with a special section devoted to the size anomaly. There we review major stylized facts about the anomaly and present several explanations for it. We conclude this review by summarizing international evidence on the value and size anomalies and by discussing value strategies implemented within and between various asset classes.
The Early Days
Since its development by Sharpe (1964), Lintner (1965), and Mossin (1966), the Capital Asset Pricing Model (CAPM) has been accepted as the main model describing the risk-return relation in financial markets. According to the CAPM, the riskiness of each stock is solely ...