X-Message-Number: 9931
Date: Tue, 23 Jun 1998 05:14:50 -0700 (PDT)
From: Doug Skrecky <>
Subject: monetary policy and price-to-book effects 

Financial Analysts Journal November/December 1997: 34-42

"New Evidence on Size and Price-to-Book Effects in Stock Returns"

Abstract:

    Firm size and price-to-book-value ratio are prominent measures in
explaining cross-sectional stock returns. Historically, average returns on
shares of small-capitalization firms and low price-to-book firms have
exceeded those on large-capitalization firms and high price-to-book firms.
Recent evidence also shows that monetary policy developments significantly
explain security returns. When we considered the influence on stock returns
of the Federal Reserve's policy stance, we found that size and
price-to-book effects depend largely on the monetary environment.
Specifically, the small-firm and low price-to-book premiums are
economically and statistically significant only in expansive monetary
policy periods and are small, and in some instances negative, in
restrictive policy periods. This evidence suggests that investors should
consider the Fed's policy stance when using strategies that rely on size or
price-to-book ratio.

Note: High beta small sized firms are an exception and offer superior
returns in both expansive (6.24%/month) and restrictive (1.44%/month)
environments. See table 3.

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