Small Vs. Large Stocks/Domestic Vs. International

In "Firm-Level Evidence on International Stock Market Comovement" (June
2005) - soon to be a major motion picture - Brooks and Del Negro
"explore the link between international stock market comovement and the
degree to which firms operate globally." The dynamic duo discovered "a large
and highly significant link: On average, a firm raising its
international sales by 10 percent raises the exposure of its stock return to
global shocks by 2 percent and reduces its exposure to country-specific

Borgsen and Glaser ("Diversifikationseffekte durch Small und Mid Caps?"
Feb. 20, 2005): "Based on an empirical analysis of European large,
small and mid cap stock indices, we find that small caps have relatively
low correlations not only with large caps but also with each other. We
show that small cap stock returns cannot be spanned by large cap stock
returns. Furthermore, we find that diversification in Europe is likely to
be more effective with a combination of small and large caps than with
large caps alone."

The authors also conclude that "large cap returns are mainly driven by
global factors whereas returns on small cap stocks are primarily driven
by local and idiosyncratic factors," confirming the earlier work of
Hansen and Rowenhorst and Griffin and Karolyi.
shocks by 1.5 percent. This link has grown stronger since the mid-1980s."

It seems no matter what part of the globe, no matter what the question,
the empirical evidence always points in the same direction: small caps,
small caps, small caps, again and again and again.