Are French small-and mid-cap stocks an alternative profitable asset class in periods of financial crisis?

In this paper, we investigate whether small- or mid-cap stocks can be considered as an alternative asset class that allows for the enhancement of the mean-variance characteristics of an investor's portfolio. Using all the French stocks listed on the Euronext Stock Market from January 2000 to December 2018, we first examine this issue from the perspective of an investor that invests in familiar asset classes such as domestic large-cap stocks and is willing to add small- and/or mid-cap domestic stocks to his or her portfolio. We also examine this issue from the perspective of a French investor who has internationally diversified his portfolio using only international large- cap indices. Finally, we attempt to measure whether the size-based performance of a portfolio varies over time. We show that investors may benefit from adding micro- or small-cap stocks to their portfolios due to the fact that size-based portfolio performance varies over time. In particular, we find that small and mid-cap stocks behave differently to largecap stocks during and after the financial crisis, meaning that they can be considered as an alternative profitable asset class in portfolio management. This result is robust to different methodologies used to classify size-based portfolios as well as to different sets of benchmark assets. Except in the case of large-cap stocks at the beginning of the financial crisis, the spanning hypothesis cannot be rejected for small-, mid- or large-cap portfolios during the period spanning from 2007-2012, but the hypothesis is rejected for all small-cap portfolios during the period spanning from 2012-2018. Our results show that French small-cap stocks behave differently than mid- and large-cap stocks behave, and they also differ when their behavior is compared to that of other international asset classes.