Scandinavian Working Papers in Economics
Discussion Papers on Economics,
University of Southern Denmark, Department of Economics
No 3/2018: Size-related premiums
Thiago de Oliveira Souza (tsouza@sam.sdu.dk)
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: 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
50 pages, April 19, 2018
Full text files
dpbe3_2018.pdf?la=da...D550BEF1E03BE6FAEC38Full text
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