79 Pages Posted: 30 Sep 2016 Last revised: 17 Aug 2017
Date Written: August 16, 2017
Consistent with implications from recent intermediary-asset-pricing literature, we find a striking nonlinearity where the equity size premium is sizable and reliably positive only following a high 'expected stock-market volatility' threshold at about the 80th percentile. The average size premium following lower-risk market conditions is near zero and not statistically significant. Size differentials in CAPM alphas exhibit a very similar nonlinear risk-based state-contingent variation. We offer related evidence that bolsters an intermediary-asset-pricing interpretation; including the behavior of stock-versus-bond return differentials, intermediary capital ratios, and liquidity.
Keywords: Equity Size Premium, SMB factor, Intermediary Asset Pricing, Volatility Risk, Illiquidity Risk
JEL Classification: G11, G12
Suggested Citation: Suggested Citation
Bansal, Naresh and Connolly, Robert A. and Stivers, Chris T., Intermediary Asset Pricing and the Nonlinear Relation between Volatility and the Equity Size Premium (August 16, 2017). Available at SSRN: https://ssrn.com/abstract=2845610 or http://dx.doi.org/10.2139/ssrn.2845610