Do large-cap exchange-traded funds perform better than their small-cap counterparts in extreme market conditions? |
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Institution: | Department of Accounting, Economics and Finance, Swinburne University of Technology, Hawthorn, VIC 3122, Australia |
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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. |
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