The size premium and macrovolatility risks: Evidence from U.S. and U.K. equity markets

The size effect is alive well but visible only when the economy is in high volatility regimes. This paper develops variant conditional asset pricing tests for the size effect with independent business cycle and volatility regimes and shows that the size effect is present conditionally during the high‐volatility regimes. This result is robust across two countries (United States and United Kingdom) with various specifications and the January effect. An economic rationale for the relation between the size premium and macrovolatility risk is provided through the capital‐market‐imperfection hypothesis.