Abstract
This paper investigates whether small markets offer higher risk-adjusted expected returns using a large set of developed and emerging markets over a time span of up to four decades. The results show that expected returns are significantly lower in larger markets, an effect more pronounced in emerging rather than developed countries. The relationship between size effects and the level of market segmentation in emerging countries is further explored in the context of financial market integration. The size premium is strong and persistent over time independently of the (fading) segmentation premium documented in the literature. Markets size effects remain statistically and economically significant in the presence of various control factors and account for up to 1% per year in terms of expected returns in emerging countries.
Highlights
Emerging financial markets resemble the mature counterparts from developed countries in important ways
This paper addresses the question of size effects at the country level in a comparative exercise across developed and emerging markets and asks whether smaller markets harbor a size premium, as well
The market size effect appears to manifest when preceded by financial liberalization, suggesting that market development is induced by opening financial markets and might represent a further step in the process of financial market integration
Summary
New articles in this journal are licensed under a Creative Commons Attribution 3.0 United States License. This journal is published by the University Library System of the University of Pittsburgh as part of its D-Scribe Digital Publishing Program, and is cosponsored by the University of Pittsburgh Press. Volume 11 No 1 (2021) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2021.230 | http://emaj.pitt.edu
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