Has the U.S. Stock Market Become More Vulnerable Over Time?

Abstract

This study demonstrates that the cross-sectional variation of systematic risk and systematic liquidity has increased from 1963 to 2008. Both have increased significantly for large-capitalization companies but have declined significantly for small-cap companies. These findings have several implications for investment managers, including the declining ability to diversify return volatilities and liquidity shocks by holding liquid, large-cap stocks. The findings suggest that the vulnerability of the U.S. equity market to unanticipated events has increased over the past few decades.

Keywords: Equity Investments, Investment Industry, Historical Trends, Portfolio Management, Portfolio Construction, Rebalancing, and Implementation, Risk Measurement and Management, Equity Portfolios