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Does Market Risk Really Explain the Size Effect?

Narasimhan Jegadeesh
The Journal of Financial and Quantitative Analysis
Vol. 27, No. 3 (Sep., 1992), pp. 337-351
DOI: 10.2307/2331323
Stable URL: http://www.jstor.org/stable/2331323
Page Count: 15
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Does Market Risk Really Explain the Size Effect?
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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.

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