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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Date

2017

Department

Rahoituksen laitos

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Mcode

Degree programme

Rahoitus

Language

en

Pages

20

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Abstract

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.

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Thesis advisor

Shin, Sean

Keywords

small country effect, small market effect, liquidity risk, risk factors, Europe, stock returns, stock markets, equity markets

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https://urn.fi/URN:NBN:fi:aalto-201803281874

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[kand] Kauppakorkeakoulu / BIZ (Open Access)