Volatility Spillover Dynamics between Large-, Mid-, and Small-Cap Stocks in the Time-Frequency Domain: Implications for Portfolio Management

Sangram Keshari Jena, Aviral Tiwari, Ashutosh Dash and Emmanuel Abakah
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Sangram Keshari Jena: Finance & Economics, International Management Institute, Bhubaneswar 751003, India
Ashutosh Dash: Accounting & Finance, Management Development Institute, Gurugram 122007, India

JRFM, 2021, vol. 14, issue 11, 1-22

Abstract: The connectedness dynamics between large-, mid-, and small-cap stocks is investigated using the forecasted error variance decomposition (FEVD) spillover framework of Diebold and Yilmaz in the time-frequency domain. Total volatility spillover (i.e., connectedness) is elevated between large-, mid-, and small-cap stocks during the study period. This high level of spillover exists in the short run only, and declines gradually in the medium to long run, thus providing opportunities for portfolio diversification (hedging) in multi-cap investing during the medium-to-long run (short run) only. Like total connectedness, a similar pattern of bilateral connectedness is observed between either of the two indices, thus providing a similar opportunity in the short and long runs. The mid-cap index emerges as the major contributor to total volatility in the system, followed by the small- and large-cap indices, during the analyzed period. The volatility spillover is time-varying in both the time and frequency domains.

Keywords: volatility spillover; connectedness; large-, mid-, and small-cap; portfolio diversification and hedging; time; frequency domain (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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