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Do large-cap exchange-traded funds perform better than their small-cap counterparts in extreme market conditions?☆

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  • Valadkhani, Abbas

Abstract

This study proposes a new threshold model that differentiates between the size and sign-dependent responses of large- and small-cap exchange-traded funds (ETFs) to changes in extreme market conditions. The asymmetric returns in extreme upsides, extreme downsides, and “in-between” markets are estimated using three sets of betas. Findings support the notion that small-cap ETFs in all seven countries fall more in extreme downturns than they rise in extreme upturns. By contrast, six out of nine large-cap ETFs climb up in upside more than they fall in downswing. Therefore, investors should be cautious when assigning excessive weights to small-cap ETFs in their portfolio.

Suggested Citation

  • Valadkhani, Abbas, 2022. "Do large-cap exchange-traded funds perform better than their small-cap counterparts in extreme market conditions?☆," Global Finance Journal, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:glofin:v:53:y:2022:i:c:s104402832200045x
    DOI: 10.1016/j.gfj.2022.100743
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    More about this item

    Keywords

    Exchange-traded fund; Beta; Asymmetry; Market capitalization; Nasdaq; S&P500;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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