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

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.