Size-related premiums

Thiago de Oliveira Souza

No 3/2018, Discussion Papers on Economics from University of Southern Denmark, Department of Economics

Abstract: This paper theoretically links the stock characteristics size and value to risks. The size premium arises – and spans the value premium – exclusively for portfolios formed in high market price of risk states. This is when the cross-sectional differences in risk premiums dominate the differences in expected cash flows connecting size and risk. Otherwise, value links better to the same risks, as it scales size by a proxy for expected cash flows. The hypothesis that value and size are (constant) risk proxies is formally rejected in the data, challenging the use of size-related portfolios as risk factors along with several strands of the literature based on this hypothesis.

Keywords: Size premium; Value premium; Risk; Conditional; Portfolio sorts (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2018-04-19
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:sdueko:2018_003

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