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The behaviour of small cap vs. large cap stocks in recessions and recoveries: Empirical evidence for the United States and Canada

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  • Switzer, Lorne N.

Abstract

This paper examines the relative performance of small-caps vs. large caps surrounding periods of peaks and troughs of economic activity, and reexamines the relationship between the small firm anomaly and the business cycle. Small-cap firms outperform large caps over the year subsequent to an economic trough. In the year prior to the business cycle peak, however, small caps tend to lag. US style based large caps perform better over peaks, but there is no dominant category across size and book to market asset classes over troughs. The US small cap premium is related to default risk, although recessions per se do not on average impact on this premium. Default risk and the inflation risk differential between Canada and the US significantly impact on the Canada-US equity premium. Abnormal positive performance observed for US small caps in the recent (post 2001) period as well as for the long horizon is attributable to the small cap growth cohort. Canadian small firm stocks also exhibit significantly positive performance in the post 2001 period.

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  • Switzer, Lorne N., 2010. "The behaviour of small cap vs. large cap stocks in recessions and recoveries: Empirical evidence for the United States and Canada," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 332-346, December.
  • Handle: RePEc:eee:ecofin:v:21:y:2010:i:3:p:332-346
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    1. repec:ove:journl:aid:12376 is not listed on IDEAS
    2. Semenov, Andrei, 2015. "The small-cap effect in the predictability of individual stock returns," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 178-197.
    3. Apergis, Nicholas & Artikis, Panagiotis G. & Kyriazis, Dimitrios, 2015. "Does stock market liquidity explain real economic activity? New evidence from two large European stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 38(C), pages 42-64.
    4. Bianconi, Marcelo & Chen, Richard & Yoshino, Joe A., 2013. "Firm value, the Sarbanes-Oxley Act and cross-listing in the U.S., Germany and Hong Kong destinations," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 25-44.
    5. Afees Adebare Salisu & Raymond Swaray & Tirimisiyu Oloko, 2018. "US stocks in the presence of oil price risk: Large cap vs. Small cap," Economics and Business Letters, Oviedo University Press, vol. 6(4), pages 116-124.
    6. Hsu, Jason C., 2012. "What drives equity market non-participation?," The North American Journal of Economics and Finance, Elsevier, vol. 23(1), pages 86-114.
    7. Afees A. Salisu & Raymond Swaray & Tirimisyu F. Oloko, 2017. "A multi-factor predictive model for oil-US stock nexus with persistence, endogeneity and conditional heteroscedasticity effects," Working Papers 024, Centre for Econometric and Allied Research, University of Ibadan.

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