The size and liquidity premium on the JSE

Abstract

This research paper is undertaken to test the size premium and liquidity premium on the JSE between January 2000 and December 2018. Previous research has found mixed results as to whether excess returns can be obtained by investing in portfolios consisting of small size, defined as market capitalisation, stocks compared to large capitalisation stocks. A liquidity premium has also been suggested on the JSE due to similarities between small capitalisation and illiquid stocks. In this paper, five portfolios based on size and liquidity are rebalanced semi-annually and annually and one, six- and twelve-month average monthly holding period returns are calculated. A dual sort is also done, rebalanced annually, to measure the average monthly holding period returns for three liquidity portfolios within three size portfolios. Prior research has suggested that small size stocks outperform large capitalisation stocks while other have a suggested a reversal of this over time. This paper finds no significant size effect or liquidity effect. Both illiquid and small size portfolio returns are significantly different to the market, proxied by the JSE All-share index. The dual sort finds that the best returns are generated in the mid capitalisation-high liquidity portfolios and lowest returns in the small capitalisation-high liquidity portfolios.