Does Quality Matter?
(2020) NEKN02 20201Department of Economics
- Abstract
- The purpose of this study is to investigate if there is any size effect in the Swedish stock market between April 2010 and December 2019, and if controlling for firms' quality improves the performance of a size-based investment strategy. The risk premium of firms with smaller market value of equity has since its discovery been under heavy scrutiny. Recent studies suggest that by quality-control, the size-based investment strategy can be improved. It is therefore highly relevant for the investor to understand how quality affects such a strategy. By employing a double sorting portfolio construction by size and quality as well as a cross-sectional regression using the Fama-MacBeth two-step regression, we examine if a small-minus-big portfolio... (More)
- The purpose of this study is to investigate if there is any size effect in the Swedish stock market between April 2010 and December 2019, and if controlling for firms' quality improves the performance of a size-based investment strategy. The risk premium of firms with smaller market value of equity has since its discovery been under heavy scrutiny. Recent studies suggest that by quality-control, the size-based investment strategy can be improved. It is therefore highly relevant for the investor to understand how quality affects such a strategy. By employing a double sorting portfolio construction by size and quality as well as a cross-sectional regression using the Fama-MacBeth two-step regression, we examine if a small-minus-big portfolio yields a positive excess return and the interaction of quality and the size risk factor. We find that there is no size effect without any quality-control, in the Swedish stock market. However, in conjunction with the quality metrics, size is a relevant risk factor in asset pricing. In conclusion, by constructing the portfolio of high-quality firms, in terms of the Return on Assets or the credit rating of a Merton-based Credit Risk Model, the size-based investment strategy can be improved. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9013283
- author
- Jalrup, Lovisa LU and Patel, Sawan LU
- supervisor
- organization
- course
- NEKN02 20201
- year
- 2020
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Investment strategy, Small-Minus-Big (SMB), size effect, firm quality, Fama-MacBeth two-step regressions.
- language
- English
- id
- 9013283
- date added to LUP
- 2020-08-29 11:17:28
- date last changed
- 2020-08-29 11:17:28
@misc{9013283, abstract = {{The purpose of this study is to investigate if there is any size effect in the Swedish stock market between April 2010 and December 2019, and if controlling for firms' quality improves the performance of a size-based investment strategy. The risk premium of firms with smaller market value of equity has since its discovery been under heavy scrutiny. Recent studies suggest that by quality-control, the size-based investment strategy can be improved. It is therefore highly relevant for the investor to understand how quality affects such a strategy. By employing a double sorting portfolio construction by size and quality as well as a cross-sectional regression using the Fama-MacBeth two-step regression, we examine if a small-minus-big portfolio yields a positive excess return and the interaction of quality and the size risk factor. We find that there is no size effect without any quality-control, in the Swedish stock market. However, in conjunction with the quality metrics, size is a relevant risk factor in asset pricing. In conclusion, by constructing the portfolio of high-quality firms, in terms of the Return on Assets or the credit rating of a Merton-based Credit Risk Model, the size-based investment strategy can be improved.}}, author = {{Jalrup, Lovisa and Patel, Sawan}}, language = {{eng}}, note = {{Student Paper}}, title = {{Does Quality Matter?}}, year = {{2020}}, }