The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different Crises

This study contributes to the ongoing debate on the size effect and size-based investment styles by investigating the return and volatility spillovers and time-varying conditional correlations among Saudi large-, mid-, and small-cap indices. To this end, we utilize the weekly returns on the MSCI Sau...

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Bibliographic Details
Published inInternational journal of financial studies Vol. 11; no. 3; p. 113
Main Author Al-Nassar, Nassar S.
Format Journal Article
LanguageEnglish
Published Basel MDPI AG 01.09.2023
Subjects
Asset allocation
crises
Crude oil prices
Diversification
Emerging markets
hedging
Hedging (Finance)
International finance
Investment advisors
Investment analysis
New stock market listings
portfolio diversification
Portfolio management
return-risk spillovers
Securities markets
size-based investment styles
Small cap investments
Stock exchanges
Stocks
time-varying correlations
Volatility
Saudi Arabia
United Kingdom
Ukraine
United States > US
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Summary:This study contributes to the ongoing debate on the size effect and size-based investment styles by investigating the return and volatility spillovers and time-varying conditional correlations among Saudi large-, mid-, and small-cap indices. To this end, we utilize the weekly returns on the MSCI Saudi large-, mid-, and small-cap indices over a long sample period, spanning several crises. The econometric approach that we use is a VAR-asymmetric BEKK-GARCH model which accounts for structural breaks. On the basis of the VAR-asymmetric BEKK-GARCH model estimation results, we calculate portfolio weights and hedge ratios, and discuss their risk management implications. The empirical results confirm the presence of unilateral return spillovers running from mid- to small-cap stocks, while multilateral volatility spillovers are documented, albeit substantially weakened when accounting for structural breaks. The time-varying conditional correlations display clear spikes around crises, which translate to higher hedge ratios, increasing the cost of hedging during turbulent times. The optimal portfolio weights suggest that investors generally overweight large caps in their portfolios during uncertain times to minimize risk without lowering expected returns. The main takeaway from our results is that passively confining fund managers to a particular size category regardless of the prevailing market conditions may lead to suboptimal performance.
ISSN:2227-7072
2227-7072
DOI:10.3390/ijfs11030113