 Market states and the risk-based explanation of the size premiumJungshik Hur, Glenn Pettengill and Vivek Singh () Journal of Empirical Finance, 2014, vol. 28, issue C, 139-150 Abstract: The distress risk explanation of the size effect implies that payment for distress risk ought to occur in up market periods, not in down market periods where distress risk ought to depress the price of securities with such risk. We find that, given the influence of the market beta, the relationship between size and returns is significant only in down markets. Further, we find a size effect in January regardless of the market state. In months other than January, a small-firm effect exists in down markets, but a large-firm effect exists in up markets. Out results are robust to different definitions of up and down markets using credit spreads and various estimations of beta. These results suggest that if payment to size is based on systematic risk then some other explanation should be developed. Alternatively, the explanation of the size effect may depend on payment to idiosyncratic risk or it might be associated with behavioral factors. In all cases, current methods of risk adjusting in academic studies are questioned. Keywords: Size premium; Market states; Size effect (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:28:y:2014:i:c:p:139-150 DOI: 10.1016/j.jempfin.2014.06.006 Access Statistics for this article Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff More articles in Journal of Empirical Finance from Elsevier |
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