Diversifikationseffekte durch Small und Mid Caps?

Sina Borgsen () and Markus Glaser ()
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Sina Borgsen: Lehrstuhl für ABWL, Finanzwirtschaft, insbesondere Bankbetriebslehre, Postal: L 5,2, 68131 Mannheim
Markus Glaser: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim

No 05-10, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: In this paper, we analyze the potential benefits of international diversification with small and mid caps. Based on an empirical analysis of European large, small and mid cap stock indices, we find that small caps have relatively low correlations not only with large caps but also with each other. We show, that small cap stock returns cannot be spanned by large cap stock returns. Furthermore, we find that diversification in Europe is likely to be more effective with a combination of small and large caps than with large caps alone. In the paper, we present several robustness checks and show that our results are also valid in sub-periods as well as for upside and downside stock market moves. Moreover, we find that large cap returns are mainly driven by global factors whereas returns on small cap stocks are primarily driven by local and idiosyncratic factors. Furthermore, the different industry classification of large and small caps explain parts of our results.

Pages: 50 pages
Date: 2005-02-20
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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