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The size premium and intertemporal risk

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Abstract

The size premium only exists in states with good investment opportunities, when the aggregate (median) book-to-market is within the top 30%, for example. The expected annual premium is around 9% in these states and insignificant otherwise. This fact is inconsistent with the unconditional version of the ICAPM, which predicts a negative size premium. The ICAPM does not condition down because of the time-varying risk premium, but there is almost no evidence that the conditional version of the ICAPM is consistent with the properties of the premium either. These results hold in each subperiod - before and after 1960 - between 1926 and 2014.

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  • de Oliveira Souza, Thiago, 2016. "The size premium and intertemporal risk," Discussion Papers on Economics 3/2016, University of Southern Denmark, Department of Economics.
    • Handle: RePEc:hhs:sdueko:2016_003
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    File URL: http://www.sdu.dk/-/media/files/om_sdu/institutter/ivoe/disc_papers/disc_2016/dpbe3_2016.pdf?la=da
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    More about this item

    Keywords

    Conditional; ICAPM; size premium; consistency; subsamples;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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