Intermediary Asset Pricing and the Nonlinear Relation between Volatility and the Equity Size Premium

79 Pages Posted: 30 Sep 2016 Last revised: 17 Aug 2017

Naresh Bansal

Saint Louis University - Department of Finance

Robert A. Connolly

University of North Carolina (UNC) at Chapel Hill - Finance Area

Chris T. Stivers

University of Louisville

Date Written: August 16, 2017

Abstract

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

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

Naresh Bansal

Saint Louis University - Department of Finance ( email )

John Cook School of Business
St. Louis, MO 63108
United States
314-977-7204 (Phone)

Robert A. Connolly

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Campus Box 3490
Chapel Hill, NC 27599-3490
United States
919-962-0053 (Phone)
919-962-5539 (Fax)

HOME PAGE: http://itr.bschool.unc.edu/faculty/connolly

Chris T. Stivers (Contact Author)

University of Louisville ( email )

Finance Dept., College of Business
University of Louisville
Louisville, KY 40292
United States
502-852-4829 (Phone)

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