The relationship between earnings yield, size, and stock returns across capital markets of different sizes

Abstract

We study the relationship between earnings yield, size, and stock returns across capital markets of different sizes. Using data from 2002-2022, we group index constituents of the SPX, ASX, NIKKEI 225, HEX, and OSEAX into five portfolios based on earnings yield and market value. We also randomize the portfolios to check for robustness. We proceed to compare the risk-return relationships across the different indices based on absolute and risk-adjusted returns. We successfully map an earnings yield effect in four of the five countries and a size effect in all five countries. However, we cannot conclude the presence of a clear difference in the relationship between small and large capital markets, at least over the entire 2002-2022 period. This suggests that the lower efficiency characterizing smaller capital markets is not reflected in factor premiums.