Size effect still present in the Athens stock exchange

Abstract

This study aims to shed some light on the academic debate about the validity of CAPM and whether systematic risk is the only factor that is priced in the markets. The fact that other factors have proved to offer return premiums in the capital markets is presented in the finance literature as anomaly. The firm size has been shown by a plethora of studies to be negatively related with returns, a phenomenon that is called small firm effect. However, recent empirical studies have claimed that the small firm effect has come to an end globally in the late 1980s. This paper comes to fill that gap and examine whether the presented size effect in the Athens Stock Exchange for the 1970s and early 1980s has still been strong in the recent years. The results show that size is negatively related to returns in the period 1990-2001 and in all of the specific market conditions studied, with various beta estimates being incapable of explaining the risk – return relationship even when thin trading is taking into account. Standard deviation as a measure of total risk proves to explain partially the constant superior returns of small firms since it is implied that these returns could be a compensation for the higher volatility involved.