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Timing the Size Risk Premia

Author

Listed:
  • Serge Darolles

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Gaëlle Le Fol

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Gulten Mero

    (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)

Abstract

In this paper, we implement a bivariate Markov-Regime-Switching (MRS) model to filter time-varying size risk premia relying on five international equity markets. Our statistical frame-work identifies two endogenous size states exhibiting distinct characteristics. The upward (downward) size state is characterized by strongly positive (low or negative) size spreads, and is positively (negatively) correlated with the lagged changes of the Composite Leading Indicator (CLI).These results hold for all the considered markets, time intervals, and are robust to alternative factor sets used to adjust for risk. They directly challenge the statistical fluke hypothesis stating that the size effect may be a chance result.

Suggested Citation

  • Serge Darolles & Gaëlle Le Fol & Gulten Mero, 2022. "Timing the Size Risk Premia," Post-Print hal-03544034, HAL.
    • Handle: RePEc:hal:journl:hal-03544034
    as

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