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86 selecting securities
2. There are contrw opinions as to the advisability of doing so. On one
hand, Joy and Jones (1986) conclude (p. 54) that “until we have
incontrovertible knowledge of the true state of market efficiency,
adoption of the anomalies-based strategies is justified.” [ See also
Jacobs and Levy (1987) for thoughts on the philosophy of anomaly
investing, and Einhom, Shangkuan, and Jones (1987) for a view from
Wall Street.] On the other hand, Merton (1987b) suggests that, since
all researchers are essentially analyzing the same data set and since
only interesting anomaly articles get published, it ”creates a fertile
environment for both unintended selection bias and for attaching
greater significance to otherwise unbiased estimates than is
justified.” Nevertheless, Merton (1987~) constructs a theoretical
model positing the existence of multiple anomalies (including the
neglected-firm and size effects) and discusses some investment
implications.
3. For the January/size connection in Australia, see Brown et al. (1983);
for Canada, see Tinic, Barone-Adesi, and West (1987); for Japan, see
Terada and Nakamura (1984) and Kat0 and Schallheim (1985); for
the United Kingdom, see Beckers, Rosenberg, and Rudd (1982).
4. For a comparison of multifactor models with the CAPM and Ross’
Arbitrage Pricing Theory, see Sharpe (1984). For a demonstration
that multifactor models may explain stock returns better than APT
models, see Blume, Gultekin, and Gultekin (1986).
5. The original BARRA model, termed ”El,” consists of six composite
risk factors-market variability, earnings variability, low valuation
and unsuccess, immaturity and smallness, growth orientation, and
financial risk-and 39 industry classifications. The second generation
BARRA model, “E2,“ consists of 13 composite risk factorvariability
in markets, success, size, trading activity, growth,
earnings/price, book/price, earnings variation, financial leverage,
foreign income, labor intensity, yield, and a low-capitalization
indicator-and 55 industry classifications.
6. Sharpe (1982) examines five attribute-beta, yield, size, bond beta
(or interest rate sensitivity), and alpha-and six broad industry
classifications. Reid (1982) examines the following attributescumulative
stock price range, co-skewness, beta, price, sigma,
relative strength, and several measures each of size, yield, and
residual retum-and eight broad industry classifications.
7. Early studies include McWilliams (1966), Miller and Widmann
(1966), Breen (1968), Breen and Savage (1968), and Nicholson (1968).
The first to test carefully in CAPM a framework was Basu (1977). For