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Economics Research International
Volume 2014 (2014), Article ID 405231, 12 pages
http://dx.doi.org/10.1155/2014/405231
Research Article

Predictable Dynamics in the Small Stock Premium

Department of Economics and Finance, University of Agder, Service Box 422, 4604 Kristiansand, Norway

Received 9 November 2013; Accepted 14 January 2014; Published 20 February 2014

Academic Editor: Thanasis Stengos

Copyright © 2014 Valeriy Zakamulin. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We start this paper by providing a detailed study of how the mean monthly return on the Small-Minus-Big (SMB) Fama-French factor is affected by the January effect and the stock market return during the preceding month and preceding calendar year. We then proceed to building a predictive model for the monthly SMB factor return that incorporates the January effect and the dependence on both the market return during the preceding month and preceding calendar year. Our findings suggest that a positive small stock premium appears mainly during the years following the years with a negative return on the market as the result of a delayed and stronger reaction of small stocks to good news and a stronger January effect. We also argue that the January effect constitutes a much lesser part of the size effect than it was previously supposed.