Scandinavian Working Papers in Economics

Discussion Papers on Economics,
University of Southern Denmark, Department of Economics

No 15/2014: Discount rates, market frictions, and the mystery of the size premium

Thiago de Oliveira Souza ()
Additional contact information
Thiago de Oliveira Souza: Department of Business and Economics, Postal: University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark

Abstract: The average year-end size premium is significant only when the beginning-of-year aggregate (median) book-to-market is high (top 10% to 20% in historical terms). This helps to explain why empirical research based on different time periods finds conflicting results regarding the existence of the size premium. This transitional dynamics also suggests that market frictions may explain the size premium. The effect is pervasive and it is present in different periods in the United States, and in the United Kingdom; considering the Fama/French SMB factor or the individual size portfolios; and controlling for market risk.

Keywords: Size premium; discount rates; market frictions; aggregate book-to-market

JEL-codes: G11; G12; G14

36 pages, September 16, 2014

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