Price of Risk Fluctuations and the Size Premium

Discussion Papers on Business and Economics, University of Southern Denmark, 3/2016

50 Pages Posted: 18 Jun 2016 Last revised: 2 Feb 2020

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Date Written: January 31, 2020

Abstract

This paper empirically describes how the risk premiums of size portfolios vary with macro-economic fluctuations in the price of risk at the portfolio formation dates, thereby explaining the lack of robustness involving the unconditional size premium: Only portfolios formed in "bad" states - with price of risk among the largest 30% - earn significantly positive premiums (7.5% per year on average). Inevitably, the subsample in which the premium is absent dominates and easily distorts the unconditional evidence that supports the size premium literature. Conditional tests contradict the (unconditional) conclusions that the size premium is consistent with the ICAPM or non-existent after 1981.

Keywords: Size factor, conditional tests, subsamples, CAPM, Fama and French

JEL Classification: G11, G12, G14

Suggested Citation

de Oliveira Souza, Thiago, Price of Risk Fluctuations and the Size Premium (January 31, 2020). Discussion Papers on Business and Economics, University of Southern Denmark, 3/2016, Available at SSRN: https://ssrn.com/abstract=2797164 or http://dx.doi.org/10.2139/ssrn.2797164

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Danish Finance Institute ( email )

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