01 Overview
Main hypothesis of the TBTF strategy.
This study investigates the structural properties and empirical performance of a “Too Big To Fail” (TBTF) portfolio strategy, defined as a portfolio composed of the largest market capitalization stocks in the U.S. equity market. Using monthly stock-level data from the CRSP universe (NYSE, Nasdaq, AMEX), we examine whether top-ranked stocks—selected purely by market capitalization—consistently outperform others in terms of risk-adjusted returns.
Our empirical design centers around the hypothesis that structural asymmetries in capital allocation, exacerbated by post-2008 monetary policies and market concentration, result in persistent distortions in return distributions. The TBTF strategy, though simple in construction, appears to capture these structural features with surprising consistency.
We treat the year 2010 as a potential structural break, dividing the full sample into two equal-length periods:
- Pre-2010: January 1996 to December 2009
- Post-2010: January 2010 to December 2023
This periodization allows us to analyze both long-term stability and post-crisis distortions in the equity return distribution.
1 Main Hypotheses
Return Superiority: The return distributions of top market-cap stocks are structurally superior to those of mid- and small-cap stocks in terms of risk-adjusted performance (e.g., Sharpe, Sortino, Omega ratios).
Persistence and Absorption: Stocks that reach the top decile of market capitalization exhibit high persistence and low turnover, potentially distorting market competitiveness and reducing allocative efficiency.
Convex Capital Concentration: The cross-sectional distribution of capital shares among top-ranked stocks is increasingly convex, suggesting long-term structural lock-in effects analogous to wealth inequality (e.g., Lorenz curve analogy).
2 Appendix
2.1 Summary of Analytical Components in the TBTF Strategy
| Component | Description |
|---|---|
| Large vs. Small Stocks | Compare return distributions and volatility structures |
| Top 10 Stocks | Analyze list stability and industry composition (high-tech dominance) |
| Transition Analysis | Estimate transition probabilities and stationary distributions |
| Risk-Adjusted Performance | Compare Sharpe, Sortino, Omega ratios against benchmarks (ETFs, indices) |