Size- and Book-to-Market Anomalies on the JSE – Testing for the effect of market condition

Abstract

The aim of market investors is to maximise their returns from the market. Often they do this by the use of historical financial (and other relevant) information about companies and their share prices. The search for arbitrage opportunities has led to the identification of anomalies such as the size and book-to-market effects but very little research has gone into the changing of these effects over time. They have generally only been identified over long time periods on markets around the world. This investigation used the returns of portfolios based on market capitalisation or book-to-market ratio (or both) and regression analyses at specific dates at which the market conditions changed from those of a bull market to those of a bear market. This study has shown that magnitude and direction of the size and book-to-market effects change over time and that the market condition (bull or bear) is not a direct indicator of the state of the effect, although it does seem to suggest a lagged impact. The research suggests that there are significant and exploitable differences in portfolios chosen along the lines of market capitalisation or value indicators. Though no causal relationship for the existence of these anomalies has yet been identified, it seems that bear-market conditions have an impact on the magnitude (and direction) of anomalies. Since this impact continues to be seen after the bear markets, this knowledge could be exploited to reduce losses (by disinvesting in stocks that are likely to yield worse results) or even increase gains in portfolios depending on prevailing market conditions