Timing the Size Risk Premia

Serge Darolles, Gaelle Le Fol and Gulten Mero
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Serge Darolles: 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

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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.

Keywords: Size effect; factor investing; market timing; endogenous risk premia cycles; Markov-Regime-Switching factor models (search for similar items in EconPapers)
Date: 2022
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Published in Finance, 2022

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Related works:
Journal Article: Timing the Size Risk Premia (2022)
Working Paper: Timing the size risk premium (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03544034

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