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Firm Size and Cyclical Variations in Stock Returns

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  • Allan Timmermann

    ()

  • Gabriel Perez-Quiros

Abstract

Recent imperfect capital market theories predict the presence of asymmetries in the variation of small and large firms risk over the economic cycle. Small firms with little collateral should be more strongly affected by tighter credit market conditions in a recession state than large, better collateralized ones. This paper adopts a flexible econometric model to analyze these implications empirically. Consistent with theory, small firms display the highest degree of asymmetry in their risk across recession and expansion states and this translates into a higher sensitivity of these firms expected stock returns with respect to variables that measure credit market conditions.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp335.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp335.

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Date of creation: Sep 1999
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Handle: RePEc:fmg:fmgdps:dp335

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Web page: http://www.lse.ac.uk/fmg/

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