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Are Euro Area Small Cap Stocks an Asset Class? Evidence from Mean‐Variance Spanning Tests

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  • Giovanni Petrella

Abstract

In this paper we perform regression‐based tests for mean‐variance spanning in order to detect the effect of investing in euro area small capitalisation stocks on the minimum variance frontier, and apply different measures to assess the extent of diversification gains. Empirical analysis shows that euro area small and mid cap stocks, as classified by size quartile and quintile rankings, arise as truly autonomous asset classes. This result is robust to different methodologies used to form size‐based portfolios, and holds relative to both euro area large cap stocks and other international asset classes, US small capitalisation stocks included.

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  • Giovanni Petrella, 2005. "Are Euro Area Small Cap Stocks an Asset Class? Evidence from Mean‐Variance Spanning Tests," European Financial Management, European Financial Management Association, vol. 11(2), pages 229-253, March.
    • Handle: RePEc:bla:eufman:v:11:y:2005:i:2:p:229-253
    DOI: 10.1111/j.1354-7798.2005.00283.x
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    References listed on IDEAS

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    1. Raymond Kan & Guofu Zhou, 2012. "Tests of Mean-Variance Spanning," Annals of Economics and Finance, Society for AEF, vol. 13(1), pages 139-187, May.
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    Cited by:

    1. Jacobs, Heiko & Müller, Sebastian & Weber, Martin, 2014. "How should individual investors diversify? An empirical evaluation of alternative asset allocation policies," Journal of Financial Markets, Elsevier, vol. 19(C), pages 62-85.
    2. Wolfgang Bessler & Julian Holler & Philipp Kurmann, 2012. "Hedge funds and optimal asset allocation: Bayesian expectations and spanning tests," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 109-141, March.
    3. Derek Jun & Burton G. Malkiel, 2008. "New Paradigms in Stock Market Indexing," Working Papers 1050, Princeton University, Department of Economics, Center for Economic Policy Studies..
    4. Massimo Guidolin & Giovanna Nicodano, 2009. "Small caps in international equity portfolios: the effects of variance risk," Annals of Finance, Springer, vol. 5(1), pages 15-48, January.
    5. Hsuan-Chi Chen & Keng-Yu Ho & Yu-Jen Hsiao & Cheng-Huan Wu, 2010. "The Diversification Effects of Initial Public Offerings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1-2), pages 171-205.
    6. Derek Jun & Burton G. Malkiel, 2008. "New Paradigms in Stock Market Indexing," European Financial Management, European Financial Management Association, vol. 14(1), pages 118-126, January.
    7. Wolff, Dominik & Bessler, Wolfgang & Opfer, Heiko, 2012. "Multi-Asset Portfolio Optimization and Out-of-Sample Performance: An Evaluation of Black-Litterman, Mean Variance and Naïve Diversification Approaches," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62020, Verein für Socialpolitik / German Economic Association.
    8. Frédéric Blanc-Brude & Timothy Whittaker & Simon Wilde, 2017. "Searching for a listed infrastructure asset class using mean–variance spanning," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(2), pages 137-179, May.
    9. Hsuan‐Chi Chen & Keng‐Yu Ho & Yu‐Jen Hsiao & Cheng‐Huan Wu, 2010. "The Diversification Effects of Initial Public Offerings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1‐2), pages 171-205, January.
    10. Jiayu Huang & Yifan Wang & Yaojun Fan & Hexuan Li, 2022. "Gauging the effect of investor overconfidence on trading volume from the perspective of the relationship between lagged stock returns and current trading volume," International Finance, Wiley Blackwell, vol. 25(1), pages 103-123, April.
    11. Manuel Ammann & Michael Verhofen, 2008. "Testing Conditional Asset Pricing Models Using a Markov Chain Monte Carlo Approach," European Financial Management, European Financial Management Association, vol. 14(3), pages 391-418, June.
    12. Massimo Guidolin & Giovanna Nicodano, 2007. "Managing international portfolios with small capitalization stocks," Working Papers 2007-030, Federal Reserve Bank of St. Louis.
    13. Valentina Galvani & Stuart Landon, 2013. "Riding the yield curve: a spanning analysis," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 135-154, January.
    14. Kamesh Korangi & Christophe Mues & Cristi'an Bravo, 2024. "Large-scale Time-Varying Portfolio Optimisation using Graph Attention Networks," Papers 2407.15532, arXiv.org.
    15. Switzer, Lorne N. & Tahaoglu, Cagdas, 2015. "The benefits of international diversification: market development, corporate governance, market cap, and structural change effects," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 76-97.
    16. Derek Jun & Burton G. Malkiel, 2008. "New Paradigms in Stock Market Indexing," Working Papers 1050, Princeton University, Department of Economics, Center for Economic Policy Studies..
    17. Galvani, Valentina & Plourde, André, 2013. "Spanning with futures contracts," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 61-72.

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