Country-Level Size Effects in International Asset Pricing

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 four decades. Expected returns decrease significantly in larger markets, an effect that is 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 across periods independently of the (fading) segmentation premium documented in the literature with respect to the intensity of capital controls. The market size effects remain statistically and economically significant and account for up to 1% per year in terms of expected returns in emerging countries.

Keywords: Market Size, Emerging Markets, Market Integration, Capital Controls

JEL Classification: F36, G15