RISK OR SENTIMENT: VALUE AND SIZE PREMIUM UNDER TERRORISM

Tanveer Ahmad; Syed Jawwad Shahzad; Mobeen ur Rehman

doi:10.22555/pbr.v17i4.560

RISK OR SENTIMENT: VALUE AND SIZE PREMIUM UNDER TERRORISM

Tanveer Ahmad, Syed Jawwad Shahzad, Mobeen ur Rehman

Abstract

This study aims to identify the effect of terrorism on size andvalue premium using value weighted monthly returns for non-financialfirms from January 2001 to December 2010. In addition to independentsize and BE/ME (book equity to market equity) sorted portfolios, twodimensional portfolio formation methodology of Dimson, Nagel, andQuigley is used. The results reveal that market, size, value premiumand terrorism have a significant positive impact on stock returns. Thestudy further suggests that value and size premiums are dependent onthe psychological impact created by terrorist attack. Findings suggestthat the return on small stocks is higher than the returns on largestocks and the size premium occurs mainly during the months of higherterrorism activities. In contrast, value premium is more profoundduring the months of low (high) terrorist activities for portfolios sortedon one (two) dimension. This indicates that both size and BE/MEpremiums are affected by investor sentiment

Keywords

Value premium, size premium, terrorism, Pakistan.

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DOI: http://dx.doi.org/10.22555/pbr.v17i4.560