The impact of share price on seasonality and size anomalies in Australian equity returns

Abstract

Given the high correlation between a firm's stock price and market capitalisation, it is possible that the well-documented size anomaly is masking a share-price effect. Using a seemingly unrelated regression model to accommodate contemporaneous correlation between portfolios, we estimate the separate effects of firm size and share price on returns to Australian equity portfolios. The analysis is also extended to estimate seasonal components of size and price effects. Our major findings are: (i) firm size and share price have significant and independent effects on portfolio returns averaged over all months, (ii) the familiar negative relation between size and returns is confirmed across all months, and (iii) the relation between share price and returns is negative in July and positive in all other months (with the exception of January where no price effect occurs). These findings, which are consistent across subperiods and robust to method variations, highlight the need for future research to provide an economic foundation for the relation between average returns, size and price.

The investment value of the value premium

“…Looking at Table 3 in Durand et al (2007) would suggest that the large size premium is present mainly in the smallest size quintile portfolio, which would roughly correspond to our Micro portfolio 9 . Our results in Table 2 panel B confirm this results and would suggest a size premium that exceeded 2% per month across each of the book-to-market sorts, which is consistent with previous research on the size premium in Australia (Brown, et al, 1983;Durand, et al, 2007;Gaunt, et al 2000). The magnitude of such a premium is staggering if it were realizable.…”

Estimating the performance attributes of Australian multi-sector managed funds within a dynamic Kalman filter framework

“…Many studies have examined the seasonal effects associated with stock returns (Brown, Keim, Kleidon, & Marsh, 1983;Gaunt, Gray, & McIvor, 2000). With regard to the seasonal nature of mutual fund returns, a strong seasonal effect for the month of July has been found previously for this dataset, using a conditional model (Holmes & Faff, 2004).…”

Short-Term Autocorrelation in Australian Equities

“…Table 1 also allows an assessment of whether the return predictability is driven by well-known seasonals. Gaunt, Gray, and McIvor (2000) report that, while Australian equity returns in January exhibit a large seasonal component, the July seasonal is even bigger. Thus, we repeat the cross-sectional regressions for January-only months, July-only months, and 'Other' months.…”

“…Subsequent buying pressure in July raises the price and generates the negative correlation between June-July returns. In addition to seasonal effects, it is also well-known that the market capitalisation of a stock impacts on its return (see Brown et al 1983;Gaunt, Gray & McIvor 2000 for Australian findings). To examine the potential impact of firm size on return autocorrelations, we re-estimate model (1) for stocks grouped by market capitalisation.…”