Has the US Stock Market Become More Vulnerable Over Time?

Abstract

This paper demonstrates that the cross-sectional variation of systematic risk and systematic liquidity have increased over the period 1963-2008. Both have increased significantly for large-cap firms, but declined significantly for small-cap firms. Several implications for investment managers are discussed, such as the declining ability to diversify return volatilities and liquidity shocks by holding liquid, large-cap stocks. The evidence suggests that the vulnerability of the US equity market to unanticipated events has increased over the past few decades.

Keywords: Systematic risk, Systematic liquidity, Diversi

JEL Classification: G12, G14