Our paper1 aims to resolve whether there exists a distinct equity size premium that can be captured in reality. For the US, we confirm that a highly significant alpha emerges in regressions of size on quality, but for international markets we find that the size premium remains statistically indistinguishable from zero.
Moreover, the US size premium appears to be beyond the practical reach of investors, because the alpha that is observed ex post in regressions cannot be captured by controlling for quality exposures ex ante. We also find that the significant regression alpha in the US is entirely driven by the short side of quality.
Altogether, these results imply that size only adds value in conjunction with a short position in US junk stocks. However, we also show that small-cap exposure is vital for unlocking the full potential of other factors, such as value and momentum. We conclude that size is weak as a stand-alone factor but a powerful catalyst for other factors.
1 Blitz, D.C. and Hanauer, M. X., 2020, “Settling the Size matter”, working paper.