Large-Cap Versus Small-Cap Portfolio Risk and Performance: Empirical Evidence from the Thai Stock Market
Value-at-Risk (VaR) was widely adopted to measure market risk in a trading portfolio and played a decisive role in risk management.This study takes VaR to capture market risk of daily returns of a diversified portfolio of large-cap and small-cap stockslisted in MSCI (Morgan Stanley Capital International) Thailand index from January 2017 to October 2018.Historical simulation approach and delta normal approach are used in this study to compute the portfolio VaR. The result shows that some large-cap stock returns have a normal kurtosis while most large-cap stock returns have smaller kurtosis values than three signaling a moderate level of risk. On the other hand, most of small-cap stock returns have a lower peak than normal distribution but some small-cap stock returns have large kurtosis values associated with a high level of risk of an investment because it indicates that there are high probabilities of extremely large and extremely small returns.Q Q plot also suggests that most of the large-cap and small-capstock price returns do not follow normal distribution.The descriptive statistics indicates that distributions of most of the large-cap and all small-cap stock returns exhibit platykurtic and present thinner tails than normal distribution. Majority of small-cap stock returns have a smaller kurtosis which means that the returns have light-tailed and small outliers. However, a few small-cap stock returns exhibit a very high peak indicating leptokurtic and suggesting fat tails. By inspecting the Jarque-Bera statistics, the normality for all asset returns is uniformly rejected. This study estimates VaR under a condition of optimum portfolio obtained through maximizing Sharpe ratio.Delta normal VaR is calculated with a recognition of dependency among large-cap and small-cap stock returns. The result shows that, for sample portfolio, the historical models suggest lower risk than the delta normal VaR model at 95%while at 99% probability level delta normal shows that investors face lower investment risk. This paper finds that reflecting indifference portfolio performance and optimal-weighted trading strategy large-cap stock portfoliois less volatileand thus safe for a risk-averse. Small-cap stock portfolio is more volatile and presents a higher investment risk.
Keywords: Large-cap, Small-cap, Value-at-Risk