Shock Transmission Across Market Capitalization Segments in Indian Equities

This study provides a comprehensive analysis of shock transmission across the entire market capitalization spectrum of the Indian equity market, encompassing large-, mid-, small-, and micro-cap segments. Employing a Vector Autoregression (VAR) framework, we investigate the dynamics through Granger causality tests, impulse response functions, and forecast error variance decomposition. Robustness is rigorously assessed using a Bayesian VAR (BVAR) with Minnesota priors. The results confirm a distinct hierarchical structure, identifying the large-cap segment as the primary anchor and net transmitter of volatility spillsovers in a top-down manner. Crucially, the inclusion of the micro-cap segment reveals a significant and previously undocumented "trickle-up" effect, where innovations in the smallest cap stocks exert a measurable influence on mid and small-cap returns. This evidence establishes a dual-channel volatility transmission mechanism, challenging a purely top-down understanding of market interconnectedness. The convergence of findings from both VAR and BVAR frameworks underscores the robustness of this dynamic. These findings have direct implications for portfolio diversification strategies and systemic risk management, highlighting the need for investors and regulators to account for the influential role of the micro-cap segment within the broader market ecosystem.