Influence Of Unusual Economic Conditions On The Occurrence Of The Size Anomaly

Abstract

Much of the explanation for the size anomaly has been assigned to taxation and behavioural issues near the end of the calendar year. However, factor models based on company characteristics suggest that some type of risk may also have a long term effect on returns.  We use a traditional multifactor model to re-examine the influence of macroeconomic variables on the magnitude and direction of size portfolio returns using traditional and Logit regression models. Our results indicate significant differences in sensitivity of returns to the market risk factor across size portfolios, but limited mean return effects of economic and financial factors. However, we find that macroeconomic factors that take on unusually extreme values influence the probable direction of annual size anomalies.  The unusual economic conditions may influence investor risk-return expectations differentially across size portfolios. These differing expectations are reflected in the occurrence of a size anomaly.