THIN TRADING, FIRM SIZE, E/P, PRICE AND JANUARY EFFECTS ON STOCK RETURNS : THE CASE OF SINGAPORE

Abstract

The Capital Asset Pricing Model (CAPM) has been a cornerstone of investment theory since the early 1960's. However, the recent evidence of what has become known as the "Small firm effect", "E/P effect" and "January effect" puts the CAPM into question. The "Small firm effect" is the empirical regularity that firms with small market values exhibit returns that significantly exceed those of the large firms. The "E/P effect" refers to the higher returns offered by portfolio with high earnings yield, while the "January effect" refers to the phenomenon that January stock returns are on the average, higher than in other months. By duplicating some U.S works, this exercise attempts to enhance the understanding and extend the knowledge of these effects in the Singapore stock market. In this Academic Exercise, three variables are examined; mainly the Firm Size, E/P and Price. Using a simultaneous framework, each of these variables is added to the CAPM as possible missing parameter for predicting asset returns. The January effect on these variables is also separately investigated. Unlike other local studies, the sample used in this exercise includes thinly traded stocks. The impact of thin trading on the firm size effect and the OLS estimates is also examined in this exercise. The findings indicate that firm size and E/P effects exist in the local market, even after adjusting for risk, January effects and other biases. However, unlike the U.S market, no linear relationship between risk adjusted returns and market values could be found. The evidence also suggests that size effect is present in actively traded stocks. The beta estimates are found to be affected by thin trading. Similar to other local studies on this topic, there appears to exist a weak E/P effect after controlling for size effect, but not vice versa. It is further found that, there seems to be no price effect in the local market after adjustment for risk. Finally, this exercise attempts to provide a comparison between the Singapore and U.S markets.