S&P 500 Equal-Weight Strategy Outperforms in Volume Ranking Tests

Exchange / Universe

For a robust and representative back-test, I recommend scanning the S&P 500 constituents rather than the entire U.S. listed universe. This subset reduces noise from smaller, less liquid stocks while maintaining broad exposure to large-cap equities. The S&P 500 also aligns with typical institutional benchmarks and liquidity profiles, ensuring practicality for modeling.

Weighting of the Overnight Position

An is preferable for simplicity and neutrality in testing. Equal weighting avoids overexposure to large-cap stocks (e.g., FAANGs) and ensures each security contributes equally to the portfolio’s risk and return. While dollar-volume weighting could reflect market liquidity, it introduces complexity and potential bias toward dominant names, which may obscure the strategy’s core logic.

Transaction Assumptions

To isolate the strategy’s performance from execution frictions, start with the default assumption of zero trading costs and perfect liquidity. Introduce round-trip costs (e.g., 2 bp per side) only if the strategy’s returns are highly sensitive to transaction costs or if the back-test aims to stress-test its robustness under realistic market conditions. This approach ensures clarity in evaluating the strategy’s intrinsic merit.

Price Used for Entry/Exit

Adopt the close-to-close methodology (enter at the day’s close and exit at the next day’s close). This is standard for “hold 1 day” tests and avoids lookahead bias by using only data available at the time of decision-making. , while sometimes used in strategies targeting overnight gaps, requires assumptions about pre-market prices and is less commonly adopted in academic or institutional back-tests.

With these parameters confirmed, proceed to pull daily volume ranks and construct the rebalance signals. Ensure the pipeline accounts for any survivorship bias in the S&P 500 universe and aligns with the chosen weighting methodology. Let me know if adjustments are needed for specific edge cases (e.g., , ETDs).