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Small-country effect within Europe: Liquidity risk, small-firm effect or other factors?
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School of Business |
Bachelor's thesis
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en
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20
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This paper studies an anomaly known as the Small-Country Effect, small countries’ tendency to produce higher risk-adjusted stock returns than large countries.
I use data from 17 European countries from July 1990 through December 2016 and provide a look to the return characteristics of European national stock markets.
I compare the compounded average annual returns between European countries grouped in portfolios based on the market capitalization of their national stock markets. I then regress the value-weighted excess return of each country individually on the sample average compounded return and several risk factors associated with liquidity and small-firm-specific risk.
I find no evidence of small countries systematically outperforming large countries in Europe. This result is robust to different risk adjustments. In addition I find the small countries to have worse risk-return characteristics than large countries, contradicting many previous studies on the subject.