The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different Crises
This study contributes to the ongoing debate on the size effect and size-based investment styles by investigating the return and volatility spillovers and time-varying conditional correlations among Saudi large-, mid-, and small-cap indices. To this end, we utilize the weekly returns on the MSCI Sau...
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| Format: | Article |
| Language: | English |
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MDPI AG
2023-09-01
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| Series: | International Journal of Financial Studies |
| Subjects: | |
| Online Access: | https://www.mdpi.com/2227-7072/11/3/113 |
| _version_ | 1797672334093451264 |
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| author | Nassar S. Al-Nassar |
| author_facet | Nassar S. Al-Nassar |
| author_sort | Nassar S. Al-Nassar |
| collection | DOAJ |
| description | This study contributes to the ongoing debate on the size effect and size-based investment styles by investigating the return and volatility spillovers and time-varying conditional correlations among Saudi large-, mid-, and small-cap indices. To this end, we utilize the weekly returns on the MSCI Saudi large-, mid-, and small-cap indices over a long sample period, spanning several crises. The econometric approach that we use is a VAR-asymmetric BEKK-GARCH model which accounts for structural breaks. On the basis of the VAR-asymmetric BEKK-GARCH model estimation results, we calculate portfolio weights and hedge ratios, and discuss their risk management implications. The empirical results confirm the presence of unilateral return spillovers running from mid- to small-cap stocks, while multilateral volatility spillovers are documented, albeit substantially weakened when accounting for structural breaks. The time-varying conditional correlations display clear spikes around crises, which translate to higher hedge ratios, increasing the cost of hedging during turbulent times. The optimal portfolio weights suggest that investors generally overweight large caps in their portfolios during uncertain times to minimize risk without lowering expected returns. The main takeaway from our results is that passively confining fund managers to a particular size category regardless of the prevailing market conditions may lead to suboptimal performance. |
| first_indexed | 2024-03-11T21:28:26Z |
| format | Article |
| id | doaj.art-0d6e63513c0b4def86768b1aaf2dc8f1 |
| institution | Directory Open Access Journal |
| issn | 2227-7072 |
| language | English |
| last_indexed | 2024-03-11T21:28:26Z |
| publishDate | 2023-09-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | International Journal of Financial Studies |
| spelling | doaj.art-0d6e63513c0b4def86768b1aaf2dc8f12023-09-27T13:11:12ZengMDPI AGInternational Journal of Financial Studies2227-70722023-09-011111311310.3390/ijfs11030113The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different CrisesNassar S. Al-Nassar0Department of Economics and Finance, College of Business and Economics, Qassim University, Buraydah 51452, Saudi ArabiaThis study contributes to the ongoing debate on the size effect and size-based investment styles by investigating the return and volatility spillovers and time-varying conditional correlations among Saudi large-, mid-, and small-cap indices. To this end, we utilize the weekly returns on the MSCI Saudi large-, mid-, and small-cap indices over a long sample period, spanning several crises. The econometric approach that we use is a VAR-asymmetric BEKK-GARCH model which accounts for structural breaks. On the basis of the VAR-asymmetric BEKK-GARCH model estimation results, we calculate portfolio weights and hedge ratios, and discuss their risk management implications. The empirical results confirm the presence of unilateral return spillovers running from mid- to small-cap stocks, while multilateral volatility spillovers are documented, albeit substantially weakened when accounting for structural breaks. The time-varying conditional correlations display clear spikes around crises, which translate to higher hedge ratios, increasing the cost of hedging during turbulent times. The optimal portfolio weights suggest that investors generally overweight large caps in their portfolios during uncertain times to minimize risk without lowering expected returns. The main takeaway from our results is that passively confining fund managers to a particular size category regardless of the prevailing market conditions may lead to suboptimal performance.https://www.mdpi.com/2227-7072/11/3/113return-risk spilloverstime-varying correlationshedgingportfolio diversificationsize-based investment stylescrises |
| spellingShingle | Nassar S. Al-Nassar The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different Crises International Journal of Financial Studies return-risk spillovers time-varying correlations hedging portfolio diversification size-based investment styles crises |
| title | The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different Crises |
| title_full | The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different Crises |
| title_fullStr | The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different Crises |
| title_full_unstemmed | The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different Crises |
| title_short | The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different Crises |
| title_sort | dynamic return and volatility spillovers among size based stock portfolios in the saudi market and their portfolio management implications during different crises |
| topic | return-risk spillovers time-varying correlations hedging portfolio diversification size-based investment styles crises |
| url | https://www.mdpi.com/2227-7072/11/3/113 |
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