Dissecting anomalies in the Australian stock market

Abstract

The study examines the pervasiveness of eight well-documented anomalies in global equity markets for the Australian stock market. After partitioning stocks into three size categories (micro, small and big), we find that none of the eight anomalies are pervasive across size groups in either sorts or cross-sectional regressions. The existence of size, value, profitability, asset growth and accruals anomalies is primarily attributable to micro-cap stocks. Momentum and asset growth predict the expected returns of big stocks, but momentum does not predict the returns on micro stocks, and asset growth does not matter for small stocks. Contrarian returns are largely explained by stock size and value dimensions. Evidence for the earnings growth anomaly contradicts the growth extrapolation hypothesis. By looking at the hedge portfolio returns of anomalies in different regimes, we also show that many anomalies tend to exist in bear markets rather than bull markets. This evidence contradicts the risk-based explanations for the existence of anomalies.

Anomalies, risk adjustment and seasonality: Australian evidence

“…However, in a follow up paper, Brailsford, Gaunt, and O'Brien (2012b) find little evidence of a value premium on risk adjusted basis via the FF3f model. Dou, Gallagher, and Schneider (2013) highlight the influence of small-cap stocks on the value premium. The magnitude of their value premium diminishes noticeably after switching from equally-weighted to value-weighted portfolios, and is statistically insignificant for a big-stock partition of the sample.…”

“…For value-weighted portfolios, there is a positive relationship between ROA and future stock returns, and a suggestion that small and micro stocks derive this finding. Curiously, however, the relationship is not detected for equal-weighted portfolios, where the numerous 2 The difference between the findings of Gray (2014) and Dou et al (2013) is likely attributable to their respective definitions of what constitutes a 'big' stock. The former uses the top 500 stocks by market capitalisation.…”

“…Accordingly, momentum findings are also likely to be a function of the size partitions employed (if any). 3 Using the population of stocks, Brailsford and O'Brien (2008), O'Brien, Brailsford, and Gaunt (2010), Dou et al (2013) and Gray (2014) each report strong momentum profitability under value weighting, and no statistical support under equal weighting. Durand, Limkriangkrai, and Smith (2006a) form equal-weighted portfolios from the population of stocks and found no support for momentum.…”

“…Prior work shows that equal (value) weighting stocks into portfolios generates negative (positive) momentum profits (Brailsford & O'Brien, 2008;Dou et al, 2013;Gray, 2014). This strongly suggests that the momentum effect resides amongst the large-cap stocks (which weigh heavily into value-weighted portfolios).…”

“…For the negative EP partition, a profitability effect only exists when portfolios are equal weighted. Dou et al (2013) study ROA, defined as EBIT scaled by average total assets. For value-weighted portfolios, there is a positive relationship between ROA and future stock returns, and a suggestion that small and micro stocks derive this finding.…”