Assessing the Relative Magnitude of Premiums

Abstract

We examine the magnitude of the expected size, value, and profitability premiums relative to each other and across regions using monthly premiums from 1927 to 2020. We do not find reliable differences in expected premiums, individually or jointly, across the US, developed ex US, and emerging markets. We also do not find reliable differences across premiums within a region. As a result, we believe that investors should be cautious about favoring one premium over another or one region over another based on the magnitude of the expected premiums.

Keywords: size, value, profitability, expected returns, equities, factor investing, asset allocation

JEL Classification: G11, G12, G15