Elephants in Equity Markets

We introduce a novel empirical decomposition of equity price growth rates in terms of equity holdings, based on market-clearing conditions. Although our sample holdings cover only an average of 5% of market capitalization, our reconstructed equity holdings account for, on average, 89% of the time variation in over 20,000 individual stock prices and 96% of the fluctuations in 33 aggregate stock markets. Using this decomposition, we introduce new stylized facts to inform asset pricing models. We find that changes in portfolio weights explain most of the variation of individual stock prices, while aggregate wealth effects are more important for the overall stock market fluctuations. Equity markets are global and exchange rates play a key equilibrating role. They dampen local stock market volatility for all stock markets, except those associated with the three safe-haven currencies---USD, JPY, and CHF---and currencies pegged to the USD.