Information spillovers between size and value premium in average stock returns

Abstract

In this article, we investigate the nature of information transmission mechanism between portfolio of stocks sorted by market capitalization and book-to-market equity. Our empirical evidence supports the fact that there is indeed an economically meaningful spillover effect but the direction is asymmetric. Our results demonstrate small but significant volatility spillover from the portfolio of growth stocks to the portfolio of small stocks, and from the large market capitalization stocks to the portfolio of value stocks. The evidence also indicates some information spillover effect at the mean level for the smaller size and value portfolios. The implication is particularly important for determining the cost of capital, and for assessing portfolio diversification strategies of investment managers.