Background: The transmission of financial shocks across market segments is a critical determinant of systemic risk and contagion. While volatility spillovers between large and mid-cap stocks are well-documented, the role of the micro-cap segment in the broader market ecosystem remains underexplored. Objective: This study aims to provide 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. Materials and Methods: Employing a Vector Autoregression (VAR) framework, the dynamics have been investigated through Granger causality tests, impulse response functions, and forecast error variance decomposition. To ensure the validity of the inferences, robustness is rigorously assessed using a Bayesian VAR (BVAR) with Minnesota priors. Results: The results identify the large-cap segment as the primary anchor and net transmitter of volatility spillovers 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. The convergence of findings from both VAR and BVAR frameworks underscores the robustness of this dynamic. Conclusion: This evidence establishes a dual-channel volatility transmission mechanism, challenging a purely top-down understanding of market interconnectedness. 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.
Aditya Joshi (Mon,) studied this question.