Macroscopic properties of equity markets: stylized facts and portfolio performance

TL;DR

This paper empirically examines key macroscopic properties of US equity markets, identifies stylized facts, and evaluates the performance of diversity-weighted portfolios, providing insights for active investment strategies.

Contribution

It offers a comprehensive empirical analysis of market-wide properties and systematically tests portfolio performance, addressing gaps in conventional financial models.

Findings

Identification of stylized facts about market capitalizations and returns

Performance evaluation of diversity-weighted portfolios under various settings

Results are reproducible using publicly available code

Abstract

Macroscopic properties of equity markets affect the performance of active equity strategies but many are not adequately captured by conventional models of financial mathematics and econometrics. Using the CRSP Database of the US equity market, we study empirically several macroscopic properties defined in terms of market capitalizations and returns, and highlight a list of stylized facts and open questions motivated in part by stochastic portfolio theory. Additionally, we present a systematic backtest of the diversity-weighted portfolio under various configurations and study its performance in relation to macroscopic quantities. All of our results can be replicated using codes made available on our online repository.