Resurrecting the size effect: Evidence from a panel nonlinear cointegration model for the G7 stock markets

Abstract

a b s t r a c t JEL classification: G10 C23 Keywords: Size effect Stock returns Panel threshold cointegration G7 stock marketsFirm size is known to be an important factor affecting stock returns. This study proposes a panel threshold cointegration model to investigate the impact of the size effect on stock returns for the panel of G7 countries: Canada, France, Germany, Italy, Japan, the U.K., and the U.S. over the period 1991:1-2012:12. The empirical analysis is based upon the nonlinear cointegration framework using the asymmetric ARDL cointegration methodology (Shin et al., 2011). This methodological approach permits a much richer degree of flexibility in the dynamic adjustment process toward equilibrium, than in the classical linear model. Our findings indicate the presence of asymmetric adjustment around a unique long-run equilibrium. In particular, the empirical analysis provides evidence of asymmetric effects between stock returns and the size effect, while controlling for the book-tomarket ratio and the price-to-earnings ratio. (J.E. Payne). 1 The use of panel cointegration modeling circumvents the endogeneity bias of relying upon OLS estimation.1058-3300/$see front matter

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