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Volatility Spillover Dynamics between Large-, Mid-, and Small-Cap Stocks in the Time-Frequency Domain: Implications for Portfolio Management

Author

Listed:
  • Sangram Keshari Jena

    (Finance & Economics, International Management Institute, Bhubaneswar 751003, India)

  • Aviral Kumar Tiwari

    (Finance & Economics, Rajagiri Business School, Rajagiri Valley Campus, Kochi 682039, India)

  • Ashutosh Dash

    (Accounting & Finance, Management Development Institute, Gurugram 122007, India)

  • Emmanuel Joel Aikins Abakah

    (Department of Applied Economics, University of Cape Coast, Cape Coast CC-075-8216, Ghana)

Abstract

The connectedness dynamics between large-, mid-, and small-cap stocks is investigated using the forecasted error variance decomposition (FEVD) spillover framework of Diebold and Yilmaz in the time-frequency domain. Total volatility spillover (i.e., connectedness) is elevated between large-, mid-, and small-cap stocks during the study period. This high level of spillover exists in the short run only, and declines gradually in the medium to long run, thus providing opportunities for portfolio diversification (hedging) in multi-cap investing during the medium-to-long run (short run) only. Like total connectedness, a similar pattern of bilateral connectedness is observed between either of the two indices, thus providing a similar opportunity in the short and long runs. The mid-cap index emerges as the major contributor to total volatility in the system, followed by the small- and large-cap indices, during the analyzed period. The volatility spillover is time-varying in both the time and frequency domains.

Suggested Citation

  • Sangram Keshari Jena & Aviral Kumar Tiwari & Ashutosh Dash & Emmanuel Joel Aikins Abakah, 2021. "Volatility Spillover Dynamics between Large-, Mid-, and Small-Cap Stocks in the Time-Frequency Domain: Implications for Portfolio Management," JRFM, MDPI, vol. 14(11), pages 1-22, November.
    • Handle: RePEc:gam:jjrfmx:v:14:y:2021:i:11:p:531-:d:674249
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    Cited by:

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    2. Nassar S. Al-Nassar, 2023. "The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different Crises," IJFS, MDPI, vol. 11(3), pages 1-30, September.

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