The performance of long-term investments in the Italian stock market

The objective of this work is to research on the impact of delisting effects and dropping off the market index on the investment performance and to understand whether the survivorship bias matters in the context of long-term investments. Given the calculation algorithms of a market index which exclude any failed, small and or illiquid company, we legitimately believe that a market index would have outperformed any passively managed not-rebalanced portfolio in the long run. We denote this phenomenon as natural survivorship bias. However, the results of this work show that the opposite is true. In all cases and under all regimes, the observed portfolios outperform noticeably the market index. We find that on average, small and less liquid firms gained higher returns than bigger and more liquid players. The literature defines the small firm effect as a concept which states that small cap firms outperform the large cap firms. Lower prices lead to larger price appreciations. We therefore believe that the phenomena like Small firm effect, Neglected firm effect and Illiquidity premium might explain the obtained results.