An Unconditional Asset‐Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk

Abstract

In an intertemporal economy where both risk (stock beta) and expected return are time varying, the authors derive a linear relation between the unconditional beta and the unconditional return under certain stationarity assumptions about the stochastic process of size‐portfolio betas. The model suggests the use of long time periods to estimate the unconditional portfolio betas. The authors find that, after controlling for the betas thus estimated, a firm‐size proxy, such as the logarithm of the firm size, does not have explanatory power for the averaged returns across the size‐ranked portfolios.

Common and fundamental factors in stock returns of Canadian oil and gas companies

“…We know from previous work by Chan and al. (1985) and Chan and Chen (1988) that the market risk premium is, in general, larger for smaller firms. As a result, the β m of (small) natural gas intensive firms is logically larger than for (large) crude oil intensive firms.…”

Efficient Capital Markets: II

“…They attribute these results to market overreaction to extreme bad or good news about firms. Chan (1988) and Ball and Kothari (1989) argue that the winner-loser results are due to failure to risk-adjust returns. (DeBondt and Thaler (1987) disagree.)…”

Does Leverage Always Mean Risk? Evidence from ASE

“…The size of the firm has a significant negative effect on the systematic risks when β is used to express the systematic risks when using the yearly returns of the firm, this is confirmed by (Handa et al, 1989, andChan andChen, 1988). Based on this, the size of the firm will be used as one of the control variables in this model.…”