The impact of size and book-to-market among paired stocks
Mohrschladt H
Abstract
The return premiums associated with size and book-to-market also emerge between paired stocks of very similar firms. The Sharpe ratios of the traditional Fama–French-factors SMB and HML can be more than doubled if this new pair-based approach is applied. Moreover, the proposed investment strategies are particularly profitable among illiquid stocks and around earnings announcements and still yield significant premiums after 1990, while the Fama–French-factors do not. The empirical tests indicate that parts of the return premiums are due to behavioral biases indicating that investors could profit from the apparent mispricing without increasing their risk exposure.
Keywords
Paired Stocks; Fama-French-Factors; Investment Strategy; Size; Book-to-Market; Behavioral Finance