The Resurrected Size Effect Still Sleeps in the (Monetary) Winter

29 Pages Posted: 30 Sep 2022

See all articles by Marc William Simpson

Marc William Simpson

The John B. and Lillian E. Neff Department of Finance, University of Toledo

Axel Grossmann

Georgia Southern University

Multiple version iconThere are 2 versions of this paper

Date Written: September 24, 2022

Abstract

Asness et al. (2018) demonstrate the reemergence of the size premium (SMB) once one controls for firm quality within time series regressions. We demonstrate that the size premium disappears during periods of monetary tightening and is present during periods of monetary expansion; whether or not one controls for quality. Meaning that the effect is dormant in periods of monetary tightening even after one controls for firm quality. Among the channels that easing monetary policy is likely to influence small firms differently than large firms are: a) a stock market liquidity effect, b) a firm-level (balance sheet) liquidity effect, and c) increased access to credit. In addition, we show that the size effect is not only present during business cycle troughs (as in Ahn et al., 2019), but is present in monetary easing periods outside of trough periods. Investors seeking to capture this premium would be well served to consider the Fed’s policy stance and the stringency with which the Fed is pursuing its policy.

Keywords: Size premium, Factor models, Quality, Monetary policy, Liquidity

JEL Classification: G11, G12, G14, G15,

Suggested Citation

Simpson, Marc W. and Grossmann, Axel, The Resurrected Size Effect Still Sleeps in the (Monetary) Winter (September 24, 2022). Available at SSRN: https://ssrn.com/abstract=4228692 or http://dx.doi.org/10.2139/ssrn.4228692

Marc W. Simpson (Contact Author)

The John B. and Lillian E. Neff Department of Finance, University of Toledo ( email )

Toledo, OH 43606
United States

Axel Grossmann

Georgia Southern University ( email )

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