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Discount rates, market frictions, and the mystery of the size premium

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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.

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  • de Oliveira Souza, Thiago, 2014. "Discount rates, market frictions, and the mystery of the size premium," Discussion Papers on Economics 15/2014, University of Southern Denmark, Department of Economics.
    • Handle: RePEc:hhs:sdueko:2014_015
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    Cited by:

    1. Philipp J. Kremer & Andreea Talmaciu & Sandra Paterlini, 2018. "Risk minimization in multi-factor portfolios: What is the best strategy?," Annals of Operations Research, Springer, vol. 266(1), pages 255-291, July.

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    More about this item

    Keywords

    Size premium; discount rates; market frictions; aggregate book-to-market;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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