—This paper evaluates Size and book to market (BM) ratio effects in incomplete market by good deal (GD) bound. GD bound has the advantage of having no model specification error and reflecting diverse risk preference of marginal investors under incomplete market. We evaluate the performance of Size, BM ratio, and FF9 mimicking portfolios by GD bounds. As the result, Size mimicking portfolios show the increasing trend in upper GD bound but the decreasing trend in mean and lower GD bound as firm Size decreases. BM ratio mimicking portfolios show the decreasing trend of Median, upper and lower GD bound as BM ratio increases. Small Size and low BM ratio mimicking portfolios have relatively wider GD bound. These results implicate that Size effect and BM ratio effect are dependent on the selection among marginal investors that there exist infinitely under incomplete market. This also implies that market anomaly effect is due to not market inefficiency but model specification error of equilibrium approach.
—Size effects, book to market (BM) ratio effects, stochastic discount factor, Euler equation, no arbitrage condition, good deal condition.
The authors are with the Department of Business Administration, GyeongSang National University, 501 Jinju-daero, Jinju, Korea, 660-701 (e-mail: firstname.lastname@example.org).
Cite: Bongjoon Kim, Hankyung Lee, Jinsu Kim, and Insung Son, "The Analysis of Size and Book-to-Market Ratio Effects in KRX under Good Deal Condition," Journal of Economics, Business and Management vol. 3, no. 5, pp. 554-559, 2015.