Assessing the Impact of Risk Mismeasurement and Economic Cycle on the Seasonal-Size Anomaly in Hong Kong

This study investigates the seasonal-size effect in an emerging market by examining two alternative hypotheses over the period 1995 to the pre-2007 global financial crisis. Empirical results show some evidence. Small firms experience abnormally higher returns than large firms in non-January months, and the size effect in non-January months could be attributed to the consideration of risk compensation for small firms with high risk, especially when the market or firm performance is worse. Once the stock returns are adjusted appropriately for risk, the seasonal-size anomaly disappears, which tends to support the risk mismeasurement hypothesis rather than economic cycle hypothesis.