The market of small-cap stocks in the US: An empirical investigation

This thesis examines the U.S. small-cap market through an empirical lens, focusing on backtesting investment strategies based on historical data. Small caps, which are companies with relatively low market capitalization, are known for their volatility and growth potential, making them an attractive area for investors. The research seeks to uncover performance patterns and evaluate whether it’s possible to develop effective investment strategies specifically tailored to small caps, using historical data as a foundation. A significant part of the analysis involves breaking down small caps by industry, recognizing that the sector in which a company operates can greatly influence its market behavior. The thesis looks at various trading strategies, especially those that rely on major price movements, and assesses how well these strategies perform across different industries. By using backtesting, the study simulates how these strategies would have worked in the past to gauge their strength and potential future application. However, it’s important to acknowledge the limitations of this approach. While backtesting can provide useful insights into how a strategy has performed historically, it doesn’t always translate into future success. Factors like shifting macroeconomic conditions, market liquidity, and transaction costs can have a considerable impact on real-world results, often making them differ from what historical simulations suggest. Moreover, given the volatility of this market, I will discuss the fat-tail risk of the strategies involved. In conclusion, this thesis offers a detailed view of the U.S. small-cap market and critically examines the use of historical data to shape investment strategies, discussing both the opportunities and the challenges that come with implementing such approaches.