Small-cap Indexes Research Articles

VIX versus Size

VIX (CBOE Volatility Index) is often called the “fear index.” Using monthly returns from January 2000 to December 2011 as their data sample, the authors find that when the change in VIX is positive, large-capitalization stocks (the SP and when the change in VIX is negative, small-cap stocks outperform. Furthermore, the statistical significance of the change in VIX is substantially greater than SIZE (the natural logarithm of the market capitalization). The authors argue that the benefit of owning a small-cap stock depends on the distribution of the change in VIX in any given period. During the period July 2007–March 2009, both levels of the large-cap index (S&P 500) and the small-cap index (S&P 600) had a maximum drawdown over 50%, and the small-cap suffered much more than the large-cap. This huge drawdown demonstrates the importance of the effect of VIX on the cross section of stock returns

Index Membership and Small Firm Financing: New Evidence on the Bank Hold-Up Problem

This paper investigates the extent to which index membership affects small firm financing. Using a regression discontinuity specification around the lower cutoff of the Russell 2000 small-cap index, we find that index membership causes small firms to transition away from bank financing in favor of seasoned equity offerings. These effects are concentrated in the year following Russell 2000 additions and do not reverse immediately upon deletions. Liquidity, the elasticity of demand for equity, and analyst coverage also significantly increase following Russell 2000 additions, but do not significantly decrease following deletions. Finally, firms added to the Russell 2000 obtain lower spreads and have fewer covenants on the bank loans that they do initiate. Our findings are consistent with index membership mitigating the financing frictions of small firms because it improves the information environment through increased investor awareness.

Volatility Spill-over between the JSE/FTSE Indices and the South African Rand

In this paper the inter-market relationship between the South African Rand and the 5 main indices of the Johannesburg Stock Exchange was investigated. The dataset used in this paper was the daily closing values, from January 2002 to end September 2014. A multivariate CCC-GARCH (1,1) model was used to test the spill-over effects and the impact of shocks into both market. The Rand is more volatile to market shocks compared to the JSE/FTSE's All Share Index (J203), Top 40 Index (J200), Midcap Index (J201), but less volatile to market shocks than JSE/FTSE's Small Cap Index (J202) and Fledgling Index (J204).

Turn-of-the-Month: Window Dressing Behavior

We study the impact of trading during the end of the month cycle. We find that there is a meaningful negative expected return from owning equities in the last trading hour of the month. The effect is large and potentially exploitable by investors that are not tied to monthly reporting cycles. The return pattern is different from other days in equity markets and has persisted over more than a decade. The effect is generally larger for US small cap indices than large cap indices.The reasons for the effect may be related to window dressing by fund managers, risk control, lottery-ticket behavior or less likely market manipulation. The effect applies to broad indices making it less likely that it is driven by a few traders but rather by the behavior of a large group of traders responding to the same incentives.

U.S. Small-Cap Indexes: An Empirical Analysis of Factor Exposure and Return

We investigate the differences in risk and return in the most well-known U.S. small-cap indexes and find significant differences in returns, both absolute and risk-adjusted, and in factor exposures. The Russell 2000 underperforms the S&P 600, MSCI 1750, and the CRSP U.S. Small in the period 2001–2102. All of the indexes studied had positive market, size, and value exposure. We do, however, find differences in exposure to profitability and momentum factors. The Russell 2000 has positive momentum exposure whereas the other indexes do not have significant momentum. This difference is likely due to the annual versus quarterly reconstitution of the Russell. Also, the S&P 600 Index has significant positive exposure to profitability whereas the other indexes have significant negative exposure. This difference is likely attributed to the profitability screens employed by S&P in determining index constituents.

Testing market efficiency on the Johannesburg Stock Exchange using the overlapping serial test

It has been suggested that stock exchanges may be tested for market efficiency by using tests for assessing random number generators. This paper uses such a test to assess the efficiency of small, mid and large cap indices on the Johannesburg Stock Exchange, while making adjustments for thin trading which occurs during the sample period. The efficiency of these indices is examined using individual share level data as well as index level data over a stable period and a period containing the 2008 financial crisis. This study finds evidence suggesting that small cap stocks exhibit a high degree of non-randomness in price movements. Some inefficiencies also appear to be present in mid and large cap stocks, however to a much lesser extent, with large cap stocks exhibiting higher levels of efficiency. Many of the stocks investigated appear to exhibit lower levels of efficiency during the crisis period. This may be a result of increased irrationality during periods of uncertainty.

Market Reactions to Changes in the S&P/TSX SmallCap Index

Stocks added to major indexes generally experience positive abnormal returns. However, researchers disagree on whether these abnormal returns are permanent or temporary, and offer competing explanations. We examine stock price and trading volume reactions to changes in the Canadian S&amp;P/TSX SmallCap Index. Our primary finding is that significant changes in prices and trading volume occur for stocks added to or deleted from the S&amp;P/TSX SmallCap Index. The effect depends on whether a stock is a pure addition or deletion as opposed to being shifted between S&amp;P/TSX indexes. <b>TOPICS:</b>Mutual funds/passive investing/indexing, fundamental equity analysis, developed

Fundamentally Weighted Global Small Companies

The author presents an empirical analysis into the issue of universe definition for a fundamentally weighted, global small-company equity strategy. Consistent with previous research on fundamental indexing for large companies, the author confirms the performance advantages of weighting securities by fundamental measures of company size, as opposed to market capitalization, for a variety of global small-company strategies. Beyond these results, the author provides evidence that small-company strategies that define their universe by market capitalization criteria, in the manner of traditional small-cap indices, enjoy a performance advantage over those that use fundamental-ranking criteria. Although this improvement in risk-adjusted performance is accompanied by marginally increased total risk and turnover, rudimentary adjustments to the market cap-defined universe counteract both effects.

A Study of Risk and Return of Different Sectors During Different Phases of Stock Market During 2007-2009 in India

Stock Market is ever green field for Investment and good choice of investment provides very lucrative scope. But it is very difficult to select companies for investment as there are number of companies listed in different stock exchanges. In this paper I have tried to catagorise different stocks on the basis of Market Capitalisation and study them on the basis of performance of different Indices of Bombay Stock Exchange related to different Capitalisation Stocks i.e. Sensex for Large Cap Stocks, Mid Cap Index for Mid Cap Stocks and Small Cap Index for Small Cap Stocks. For my study I have used daily value of selected Indices from January 2007 to December 2009. In this study I have found that there is no major difference in risk and return of different capitalisation stocks, but there is significant difference in risk and return of same stocks in different phases of stock market i.e. Bearish Trend, Consolidation Period and Bullish Trend.

Performance of Buyout Funds Revisited?*

This article shows that publicly available data on buyout fund returns are sufficient to replicate the recent findings derived from superior but proprietary datasets. The average buyout fund outperforms the SP and the average buyout fund return is similar to that of small-cap indices and that of the oldest small-cap passive mutual fund (“DFA micro-cap”). If the benchmark is changed to small and value indices, and is levered up, the average buyout fund underperforms by 3.1% p.a.

Multivariate GARCH models and risk minimizing portfolios: The importance of medium and small firms

This paper re-examines the relationship among different firms using a combination of multivariate GARCH models (symmetric and asymmetric with structural changes) and the IBEX 35, IBEX MEDIUM CAP, and IBEX SMALL CAP indexes as the benchmarks to track the performance of large, medium and small firms, respectively. Our findings show the existence of a significant difference in the transmission of volatility when the asymmetric behavior and structural changes are considered. After calculating the risk minimizing portfolio weights, we show that the minimum-volatility portfolio is composed of medium and small indexes with a higher weight of medium firms for a set of different scenarios.

Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index

We examine market reactions to changes in the FTSE SmallCap index membership, which are determined quarterly based on market capitalization and are free of information effects. Our main results are asymmetric price and liquidity responses between the firms that are shifted between FTSE indexes and the firms that are new to FTSE indexes. Firms promoted from a smaller-cap to a larger-cap FTSE index experience a permanent increase in stock price accompanied by improvements in liquidity. Similarly, firms demoted from a larger-cap to a smaller-cap FTSE index experience a permanent decrease in stock price accompanied by declines in liquidity. In contrast, firms added to the FTSE SmallCap index that were not previously in FTSE indexes show a transitory price gain and declines in liquidity. The results support the liquidity and price pressure hypotheses.

Portfolio analysis of intraday covariance matrix in the Greek equity market

The intraday nonparametric estimation of the variance–covariance matrix adds to the literature in portfolio analysis of the Greek equity market. This paper examines the economic value of various realized volatility and covariance estimators under the strategy of volatility timing. I use three types of portfolios: Global Minimum Variance, Capital Market Line and Capital Market Line with only positive weights. The estimators of volatilities and covariances use 5-min high-frequency intraday data. The dataset concerns the FTSE/ATHEX Large Cap index, FTSE/ATHEX Mid Cap index, and the FTSE/ATHEX Small Cap index of the Greek equity market (Athens Stock Exchange). As far as I know, this is the first work of its kind for the Greek equity market. Results concern not only the comparison of various estimators but also the comparison of different types of portfolios, in the strategy of volatility timing. The economic value of the contemporary non-parametric realized volatility estimators is more significant than this when the covariance is estimated by the daily squared returns. Moreover, the economic value (in b.p.s) of each estimator changes with the volatility timing.

Asymmetric Price and Liquidity Responses to Changes in the FTSE SmallCap Index

We examine market reactions to changes in the FTSE SmallCap index membership, which are determined quarterly based on market capitalization and are free of information effects. Our main results are asymmetric price and liquidity responses between the firms that are shifted between FTSE indexes and the firms that are new to FTSE indexes. Firms promoted from a smaller-cap to a larger-cap FTSE index experience a permanent increase in stock price accompanied by improvements in liquidity. Similarly, firms demoted from a larger-cap to a smaller-cap FTSE index experience a permanent decrease in stock price accompanied by declines in liquidity. In contrast, firms added to the FTSE SmallCap index that were not previously in FTSE indexes show a transitory price gain and declines in liquidity. The results support the liquidity and price pressure hypotheses.

Performance of Buyout Funds and the Size Premium

This paper first shows that publicly available data on buyout fund returns are sufficient to replicate the recent findings derived from superior but proprietary datasets. The average buyout fund outperforms the S&P 500. But this study shows that buyout funds mainly invest in small and value companies. Adjusting for the size premium brings the average buyout fund return in line with small cap indices and with the oldest small-cap passive mutual fund (“DFA micro-cap”). If the benchmark is changed to small and value indices, and is levered up, the average buyout fund underperforms by -3.1% per annum.

Firm Size Transmission Effect and Price-Volume Relationship Analysis During Financial Tsunami Periods

Investors attend importance to forecast the price of financial assets, thus, the factors affecting the stock price are usually the focus of financial research in the field, in which the most important factors to scholars are firm size transmission effect and price-volume relationship. In this study, the analysis of these two items in the Taiwan stock market is conducted. The results indicate that the firm size transmission effect is almost significant, and the reversal phenomenon also exists. However, before the financial tsunami, the firm size transmission effect does not significantly exist; this result also indirectly proves the directional asymmetry of the market returns, proposed by McQueen, Pinegar, and Thorley (1996). For price and volume relationship, big cap index reveals that volume leads to price before the financial tsunami, and small cap index appears that price leads to volume in 2010.

Style investing and momentum investing: A case study

We examine whether an investor should choose a style rotation strategy (that is style investing) rather than a buy-and-hold strategy or a momentum strategy. We run out-of-sample forecasting/investing horse races between style rotation strategies (based on logit models), simple momentum strategies and buy-and-hold strategies. Regarding style rotation strategies, we consider switches between value and growth indexes, and small-cap and large-cap indexes. To gain a long-term perspective, we use the freely available Fama–French data set, which segments US stocks into value and growth stocks, and small-cap and large-cap stocks. Although the choice of variables to include in the logit models and the investment outcomes depend on the indexes (style switches) under review, our study shows that style switching gives interesting investment results.

Transmisión de información y carteras óptimas en el mercado bursátil español

This article examines the transmission of volatility and the creation of optimal risk minimizing portfolios among large-, medium- and small-capitalization companies of the Spanish stock market, which are represented by the IBEX 35, IBEX MEDIUM CAP and IBEX SMALL CAP indexes respectively. A comparison of two volatility models, a symmetric and an asymmetric multivariate GARCH model with structural changes, shows that there are differences in the transmission of volatility. We demonstrate that, in all the possible scenarios analyzed, the risk minimizing portfolio is composed of medium and small indexes with a higher weight of medium firms. The risk is even lower when asymmetric effects and structural changes are taken into account. These results therefore illustrate the importance of knowing the main characteristics of these firms with respect to those than compose the IBEX 35 index.

International Equity Diversification: Small-Cap Versus Small-Market Effects

Increasing correlation among international equity markets has prompted investors to seek new investment opportunities. To shed light on this issue for U.S. investors, this paper measures economic benefits of international equity diversification using mean-variance and higher-moments frameworks and tests their significance across a broad spectrum of stocks in 63 developed, emerging, and frontier markets from January 1997 to June 2010. The focus is on examining the small-cap versus small-market effects by creating ranking variables representing market size and stock size. This paper finds the presence of economic benefits, indicating potential risk reduction or broader investment opportunities. These benefits tend to be negatively correlated with market size or stock size, with market size tending to be stronger. Small-cap indexes in smaller emerging markets and frontier-market indexes yield higher benefits. Finally, diversification benefits existed during the 2000-2003 and 2007-2010 crisis periods, highlighting the importance of the ability to forecast asset return moments.

Recovering copulas from limited information and an application to asset allocation

This paper proposes an entropy-based method to construct a new class of copulas – the most entropic canonical copulas (MECC). Our empirical study focuses on an investment problem for an investor with a constant relative risk aversion (CRRA) utility function allocating wealth between the Dow Jones Large-Cap and Small-Cap indices, of which the contemporaneous dependence can be modeled by the MECC or other commonly-used copulas. Both the theoretical analysis of the method and the empirical study indicate the potential for enormous statistical and economic gains as a result of using the MECC.