Traveling Waves in Equity Markets with Rank-Based Entry and Exit

Graeme Baker and Caroline Smyth

Papers from arXiv.org

Abstract: We model equity markets using geometric Brownian particles entering and exiting at rank-dependent intensities. In the many-firm limit, the capital distribution converges to the solution of a reaction-diffusion equation with reaction term built from the intensities. Calibrated on CRSP data, the reaction term is bistable, and the long-run distribution is a traveling wave: we prove existence, uniqueness, and, for constant coefficients, exponential relaxation. Turnover, not drift, stabilizes the calibrated market. With measured volatility, the wave tracks the empirical capital distribution in every decade, determines the capitalization growth of diversity-weighted portfolios, and places the market just inside the boundary of the diverse phase. Turnover reclaims most of what rebalancing gains.

Date: 2026-08
References: Add references at CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2608.27156 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2608.27156

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().