The Size Effect on the London Stock Exchange

This paper analyzes the performance of stocks listed on the London Stock Exchanges to determine whether there is a size effect. The hypothesis being examined is whether the smaller stocks obtain higher returns than the large ones even after adjusting for risk. The study period is from 1990 to 2021 and we work with the FTSE All-Share, FTSE 250 and FTSE Small Cap Indices as an approximation to the size segments under study with both daily and monthly returns. We find the following results: a) the returns of the FTSE 250 and FTSE Small Cap Indices were higher than the FTSE All-Share Index but not systematically; b) a measurement problem was found in the risk of small stocks manifested in that with monthly data there is a volatility 6 points higher than that obtained with daily data (for the FTSE Small Cap Index); c) we find a size premium of almost 2% for the FTSE 250 and FTSE Small Cap indices after correcting partially the risk of these indices using monthly data