Dynamics in stock return volatility and spillover effects: Does firm size matter?

• Autor(a) principal: Antunes, Francisco da Silva
• Data de Publicação: 2021
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/24210
• topic: Volatilidade -- Volatility; Spillover effects; Univariate GARCH; Multivariate GARCH; Dimensão da empresa -- Size of the company; Efeitos de repercussão; GARCH univariado; GARCH multivariado

This dissertation explores the relationship between firm size and equity volatility. Working from a solid ground that indicates the existence of a size effect in Banz (1981) and Reinganum (1981), we test two related topics. At first, whether an asymmetric effect in returns’ volatility is linked to firm size and firm’s industrial sector. Secondly, the existence of spillover effects between large and small market capitalization firms. By comparing different ARCH type models, we find that good and bad news have different impacts on volatility, as the asymmetric specifications outperform the symmetric GARCH model. In addition, our empirical results show that such dynamic is stronger in large-cap firms, but it may vary according to the firm’s sector. This study also signals a strong co-movement between large and small firms, as both display a similar dynamic in volatility and a strong correlation, especially in periods of financial turmoil. Using multivariate GARCH models, we end up unveiling an asymmetric behaviour not only in volatility but also in conditional correlation. All ARCH type models are employed to the returns’ volatility of S&P500 Index, Russel 2000 Index, and their respective industry sectors over the 2006-2020 period.