1) Momentum...the Only Practical Anomaly?
2) Small cap excess return.
Here's more on the second from Index Universe:
There has been some recent discussion calling into question the existence of the size premium. With that in mind, I thought it worth taking an in-depth look at the issue. The first of my three installments will start with the beginning of the small-cap premium research. Before we start, I ask that you keep the following quote from Mark Twain in mind: "The rumors of my death have been greatly exaggerated." Its relevance will become apparent as the data are explored.And:
The original research on the small-cap premium was done by Rolf Banz. Banz's paper was published in 1981. Among his findings was: "The results show that, in the 1936-1975 period, the common stock of small firms had, on average, higher risk-adjusted [emphasis mine] returns than the common stock of larger firms."
Professors Eugene Fama and Kenneth French looked at the evidence in their famous 1992 paper, "The Cross-Section of Expected Stock Returns." Their study covered the period 1963-1990. Their findings were different from Banz's. While they did find that small stocks had higher average returns, they believed the higher returns were compensation for risk, citing several papers that provided risk-based explanations. They certainly didn't state and—to my knowledge, have never stated—that small stocks provided higher risk-adjusted returns....MUCH MORE
Talking About Small-Cap Premium, Part 2
See also Dimson and Marsh 1999
And regarding the first, from Optimal Momentum:
Interest in momentum is growing as it gains recognition as the premier market anomaly. Our purpose here is not to report on every item or research finding related to momentum. We prefer instead to point out those that are most important or interesting often because they seem exceptionally good, or, occasionally, because they seem exceptionally bad.
One exceptionally good piece of research is the working paper by Israel and Moskowitz (I&M) called "The Role of Shorting, Firm Size, and Time on Market Anomalies." This paper has important implications not only for momentum investors, but also for those who are interested in size and value investment tilts. I&M look at all three with respect to firm size, long or short market exposure, and results stability over time.
Most research papers on relative strength momentum present it on a long/short basis where you buy winning stocks and short losing ones. In some papers, you can find some long-only results buried in a table somewhere. Except in my papers, it can be challenging to find visual representations or detailed analyses of long-only momentum. However, I&M offer insightful analysis of long-only momentum. It is important to look at long-only results for two reasons. First, most investors are interested only in the long side of the market. Second, in the words of I&M:Using data over the last 86 years in the U.S. stock market (from 1926 to 2011) and over the last four decades in international stock markets and other asset classes (from 1972 to 2011), we find that the importance of shorting is inconsequential for all strategies when looking at raw returns. For an investor who cares only about raw returns, the return premia to size, value, and momentum are dominated by the contribution from long positions.Therefore, even if you are open to shorting, it does not make much sense from a return perspective.
I&M charts and tables show the top 30% of long-only momentum US stocks from 1927 through 2011 based on the past 12-month return skipping the most recent month. They also show the top 30% of value stocks using the standard book-to-market equity ratio, BE/ME, and the smallest 30% of US stocks based on market capitalization.
...MORE
HT on momentum, I don't remember who sent it but the blog is new to us.
