The small-cap effect in the predictability of individual stock returns

•We investigate the predictability of the daily open-to-open and close-to-close returns.•The predictability of both types of returns increases from bigger to smaller stocks.•The increase is stronger for the open-to-open returns.•We call this the small-cap effect in the predictability of individual stock returns.•The small-cap effect is more pronounced for the high-momentum stocks.

The paper investigates whether the choice of opening prices yields the same predictability of daily returns on individual stocks as the choice of closing prices. Based on the sample of NYSE, Nasdaq, and AMEX listed stocks for the period from January 2009 to November 2013, it is concluded that (a) the degree of predictability and implied forecasting accuracy of both types of returns substantially increase as smaller stocks are examined and (b) this increase is stronger for the open-to-open returns than for the close-to-close returns. This small-cap effect in the predictability of individual stock returns is stronger for the high-momentum stocks.