Should You Tilt Your Equity Portfolio to Smaller Countries?

Abstract

In this article, the authors examine the relation between country size, measured as the aggregate market capitalization of the listed stocks in a country, and individual stock returns. They find that stocks from small countries tend to have higher average returns than stocks from large countries. The country size effect is largely independent of the firm size effect and other country quantitative factors such as book-to-market and momentum. The authors conjecture that the country size effect is due to home bias and provide mixed evidence in support of this conjecture.