Market Size Effects and Integration: Emerging vs. Developed Countries

Abstract

This paper investigates market size effects for expected returns from a large set of developed and emerging markets over a time span of up to three decades. We find that expected returns decrease significantly in larger markets, an effect that is dominant in emerging rather than developed countries. Furthermore, we explore the relationship between size effects and the level of market segmentation in emerging countries. The size premium remains strong and persistent across periods over and above the segmentation premium documented in the literature with respect to the intensity of capital controls. This implies that as markets integrate and expand, expected returns fall due to the decrease of both size as well as segmentation premiums. The market size effect is independent of the segmentation premium and accounts for about 1% per year in terms of expected returns in emerging countries. JEL classification: F36, G15