39 Pages Posted: 8 Dec 2011 Last revised: 15 Oct 2013
Date Written: April 13, 2013
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 bivariate regime switching models of the industrial production growth and the small firm premium (SMB). The SMB factor 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. This new result is not explained by the January effect. An economic story for the size premium is provided through the capital market imperfection hypothesis.
Keywords: The Size Premium, Volatility Regime Switching, Capital Market Imperfections
JEL Classification: E32, E52, G12
Suggested Citation: Suggested Citation