Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE credits
This study deals with one of the efficient market hypothesis’ anomaly. The research aims at proving the
existence of a size anomaly by answering the question: can you outperform the market by investing in
small and mid caps? It is in fact a questioning of the well-know efficient market hypothesis (EMH). We
investigate the size effect in the situation of a passive strategy with different indices (Russell Indices and
S&P Indices) from 1995 to 2005.
The introduction gives to the reader the background he needs to understand the methodology and the
approach of the issue by the authors. Key concepts are defined such as EMH, passive strategy.
The second part exposes the methodology the authors choose and the methodology of exploited indices.
The research consist on measuring the risk adjusting excess returns by comparing the market index
return (S&P 500 or Russell 3000) and the Small and Mid Caps indices (S&P Small Cap 600, S&P Mid
Cap 400, Russell Mid Cap and Russell 2000) over the period. Indeed the methodology of indices is
exposing in details to understand in which extent the study can be influence by the construction of
Then in part 3 the authors describe theories that are possible explanations for the size effect. Then it is
understandable that the size anomaly is the result of a set of factors that generate abnormal returns.
These theories help the authors to come up with a model that gives an overview of the research.
After having explained their research method and reveal their empirical findings. The authors
demonstrate that excess returns can be earned by investing in small and mid caps indices even after
controlling for risk. The risk adjusting excess returns their findings can potentially be explained by the
other factors depicted in the theoretical part. E/P ratios, Trading Costs, January effect, Overreaction are
possible reasons to explain the size anomaly. They also find an instability and/or reversal of the size
effect consistent with one of the theories. However the authors find data with non statistic significance,
so I accept the null hypothesis that the excess returns of small and mid caps indices are equal to zero.
The paper ends with a discussion about the limitations of the study and possible further researches. The
authors conclude that even if the existence of a size effect is obvious for some years and horizons of
investment, the passive strategy appears to be an unsuited method to take advantage of the small effect
since the results reject the null hypothesis. The authors clarify the fact that before investing in small and
mid caps, one has to be aware of all the factors that can influence his investment (beside risk) because
the size effect is a set of factors.
Key words: Efficient Market Hypothesis, Abnormal returns, Size effect (anomaly), Passive strategy,
Market Index, S&P indices, Russell indices
Umeå: Handelshögskolan vid Umeå universitet , 2007. , 66 p.
Efficient Market Hypothesis, Abnormal returns, Size effect (anomaly), Passive strategy, Market Index, S&P indices, Russell indices