CHAPTER 17
Large and Small Cap
Stocks in Europe:
Covariance Asymmetry,
Volatility Spillovers and
Beta Estimates
Helena Chuliá and Hipòlit Torró∗
17.1 INTRODUCTION
Several studies show that small cap returns tend to behave differently from
large cap returns (Banz, 1981; Chan and Chen, 1991). This fact suggests that
diversifying into small cap stocks might improve portfolio performance. In
fact, the main empirical evidence on small cap returns shows that small caps
distinguish themselves from large caps due to economic and market related
characteristics (for a literature review on this topic see Petrella, 2005).
Moreover, a large number of papers have shown that returns of large cap-
italization stocks can be used to predict the returns of smaller stocks, but not
vice versa (Lo and Mackinlay, 1990). This asymmetry in the predictability
of mean returns does not necessarily imply that all the information is
∗Financial support from CICYT project BEC2003-09607-C04-04, and project GV04A/153 from
Generalitat Valenciana, the Instituto Valenciano de Investigaciones Económicas (IVIE) and an
FPU grant from the Ministerio de Educación y Ciencia are gratefully acknowledged.
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