A NEW INSIGHT INTO VALUE PREMIUM AND SIZE PREMIUM

摘要

In this paper, we show that in the Indiancontext, there is zero value premium(VP) among mid-market capitalisation(MC) portfolios and zero size premium(SP) among mid-price-to-book ratio(PB) portfolios. That is, in the mid-MCcategory, the low-PB stocks earn thesame return as high-PB stocks; similarly,among the mid-PB stocks, the ones withlow-MC earn the same return as thosewith high-MC. As we move away fromthe mid category, we observe significant VPs and SPs. More specifically,among low-MC stocks, there is positiveVP (that is, low-PB stocks earn morethan high-PB stocks), while in high-MCcategory, there is negative VP (low-PBstocks earn less than high-PB stocks). Inthe same way, among low-PB stocks,there is positive SP (low-MC stocks earnmore than high-MC stocks), while, in high-PB category, there is negative SP(low-MC stocks earn less than high-MCstocks). Fama and French (1993) havecome up with measures of VP and SP.Value, neutral, and growth stocksdenote, respectively, low-PB, mid-PB,and high-PB stocks. They measure VP byexcess return on value portfolio vis-avis growth portfolio. Similarly, smallcap, mid-cap, and big-cap stocksdenote, respectively, low-MC, mid-MC,and high-MC stocks. Size premium ismeasured by them by the excess returnof small-cap portfolio over big-capportfolio. Using Indian data from 1995to 2014, we find that though an overallVP or SP does not exist in India, VPexists for small-cap and big-cap portfolios, and SP for value and growth portfolios. Specifically, VP is significantlypositive in small-cap portfolios, weakly evident (though often close to zero) inmid-cap portfolios, and significantlynegative in big-cap portfolios. Similarly,SP is significantly positive in value portfolios, almost zero for neutral ones,and negative in growth portfolios.Thus, the mid-cap portfolio acts as azero-premium benchmark for VP, whilethe neutral portfolio acts as a zero-premium benchmark for SP. On either sideof the benchmark, there is a positive ornegative premium. We are not aware ofany work that finds the median (midcapor neutral) portfolio to be the zeropremium benchmark. We would like toiterate that our focus here is on themedian portfolios and not on analysingVP or SP per se in the Indian context.We suggest that our medial portfolioanalysis can be extended to other capital markets, including the USA.