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The Size Premium: What Role Does Macroeconomic Risk Play?

39 Pages Posted: 8 Dec 2011 Last revised: 15 Oct 2013

Sungjun Cho

Manchester Business School

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

Cho, Sungjun, The Size Premium: What Role Does Macroeconomic Risk Play? (April 13, 2013). Available at SSRN: or

Sungjun Cho (Contact Author)

Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom
44-161-306-3483 (Phone)

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