Size-Related Risk Premiums

Discussion Papers on Business and Economics, University of Southern Denmark, 3/2018

51 Pages Posted: 5 May 2018 Last revised: 6 Apr 2019

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: April 19, 2018


This paper theoretically links the stock characteristics size and value to risks. The size premium arises – and spans the value premium – exclusively for portfolios formed in high market price of risk states. This is when the cross-sectional differences in risk premiums dominate the differences in expected cash flows connecting size and risk. Otherwise, value links better to the same risks, as it scales size by a proxy for expected cash flows. The hypothesis that value and size are (constant) risk proxies is formally rejected in the data, challenging the use of size-related portfolios as risk factors along with several strands of the literature based on this hypothesis.

Keywords: Size Premium, Value Premium, Risk, Conditional, Portfolio Sorts

JEL Classification: G11, G12, G14

Suggested Citation

de Oliveira Souza, Thiago, Size-Related Risk Premiums (April 19, 2018). Discussion Papers on Business and Economics, University of Southern Denmark, 3/2018, Available at SSRN: or

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000

Danish Finance Institute ( email )

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