The Behaviour of Small Cap vs. Large Cap Stocks in Recessions and Recoveries: Empirical Evidence for the United States and Canada

North American Journal of Economics and Finance, Vol. 21, pp. 332-346, 2010

15 Pages Posted: 3 Oct 2011

See all articles by Lorne N. Switzer

Lorne N. Switzer

Concordia University, Quebec - Department of Finance

Date Written: December 2010

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 smallcaps 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.

Keywords: Small-cap equities, business cycles, style based investing, market segmentation

JEL Classification: G01, G11, G12. G14, G15

Suggested Citation

Switzer, Lorne N., The Behaviour of Small Cap vs. Large Cap Stocks in Recessions and Recoveries: Empirical Evidence for the United States and Canada (December 2010). North American Journal of Economics and Finance, Vol. 21, pp. 332-346, 2010. Available at SSRN: https://ssrn.com/abstract=1937396

Lorne N. Switzer (Contact Author)

Concordia University, Quebec - Department of Finance ( email )

John Molson School of Business
Montreal, Quebec H3G1M8
Canada
514-848-2424, x2960 (Phone)
514-848-4500 (Fax)

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