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2022
- handle: 10670/1.9ybnfl
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size effect factor investing market timing endogenous risk premia cycles Markov-Regime-Switching factor modelsSujets proches
Hours (Time) Exchanges, Securities Stock-exchange Securities exchanges Equity markets Commercial corners Stock markets Bulls and bears Corners, Commercial Exchanges, Stock Papers Public markets Investing Investment management Portfolio Supposition Assumption Pattern Model Periodicity Natural cycles Cyclic theory Synchronicity Simultaneousness Synchronism Knowledge, Classification ofCiter ce document
Serge Darolles et al., « Timing the Size Risk Premia », Finance, ID : 10670/1.9ybnfl
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In this paper, we implement a bivariate Markov-Regime-Switching (MRS) model to filter time-varying size risk premia relying on five international equity markets. Our statistical framework identifies two endogenous size states exhibiting distinct characteristics. The upward (downward) size state is characterized by strongly positive (low or negative) size spreads, and is positively (negatively) correlated with the lagged changes of the Composite Leading Indicator (CLI). These results hold for all the considered markets, time intervals, and are robust to alternative factor sets used to adjust for risk. They directly challenge the statistical fluke hypothesis stating that the size effect may be a matter of pure coincidence. JEL classification: C58, G11, G12