This study tests the size effect in the London Stock Exchange, using data for all nonfinancial
listed firms from January 1985 to December 1995. The initial tests indicate that
average stock returns are negatively related to firm size and that small firm portfolios earn
returns in excess of the market risk.
Further, the study tests whether the size effect is a proxy for variables such as the Book-to-
Market Value and the Borrowing Ratio, as well as the impact of the dividend and the Bid-
Ask spread on the return of the extreme size portfolios.
The originality of this study is in the application of the Markov Chain Model to testing the
Random Walk and Bubbles hypotheses, and the Vector Autoregression (VAR) framework
for testing the relationship of macroeconomic variables with size portfolio returns.
A Doctoral Thesis. Submitted in partial fulfillment of the requirements for the award of Doctor of Philosophy of Loughborough University.