The Size Premium: What Role Does Macroeconomic Risk Play?

Abstract:     
The size effect is alive well but visible only when the economy is in a high volatility regime. This result is robust across different sample periods and model specifications. Independent business cycle and volatility regimes are identified from regime switching models of the industrial production growth and the small firm premium (SMB). The SMB alpha is not priced by the market excess return (RMRF) and the value premium (HML) in the high volatility regime rather than in a recession regime. An economic rational for the size premium is provided through the capital market imperfection hypothesis.

Number of Pages in PDF File: 35

Keywords: The Size Premium, Volatility Regime Switching, Capital Market Imperfections

JEL Classification: E32, E52, G12

working papers series