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Size and Earnings/Price Ratio Anomalies: One Effect or Two?

Published online by Cambridge University Press:  06 April 2009

Thomas J. Cook  and
Michael S. Rozeff
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Abstract

Studies of size and earnings/price ratio effects together have produced contradictory results. Does one effect subsume the other or are there two separate effects? This paper demonstrates that equity returns are related to both size and earnings/price ratio as well as the month of January. Reinganum [20] and Basu [4] are reexamined to find the reasons for their contradictory results. Reinganum's finding that size subsumes earnings/price ratio is caused by a fortuitous choice of methods. Basu's finding that earnings/price ratio subsumes size appears to be sample-specific.

This paper examines the implied standard deviation (ISD) estimated from transactions data on options, using the Black-Scholes pricing model. It was found that the distribution of the ISD is symmetric, though not normal. Also, the ISD based on the last daily observation deviates significantly from the daily average ISD. It is suggested that the daily average is a more reliable estimate of the standard deviation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 19 , Issue 4 , December 1984 , pp. 449 - 466
Copyright
Copyright © School of Business Administration, University of Washington 1984

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