SMB — Arousal,disproportionate reactions and the size-premium |
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Institution: | Accounting and Finance, M250, University of Western Australia, 35 Stirling Highway, Crawley, Western Australia 6009, Australia |
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Abstract: | This paper examines SMB (small minus big), the mimicking portfolio in Fama and French's Fama, E., French, K., 1993. Common risk factors in the returns on stocks and bonds, Journal of Financial Economics 33, 3–56] three-factor asset pricing model. We do not examine whether SMB is a factor in explaining the cross-section of returns. This paper's focus is why S is greater than B. After controlling for market-pervasive effects, we argue that the small-firm premium is driven by both investors' emotional arousal (proxied by the turnover ratio) and their disproportionate reactions to arousing stimuli. |
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