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Granular Stock Market

Author

Listed:
  • Simone Alfarano

    (Universitat Jaume I)

  • Omar Blanco-Arroyo

    (Universitat de València)

Abstract

We study how rising concentration in the U.S. stock market affects the transmis- sion of firm-level risk to aggregate volatility. Using a variance decomposition that separates common and granular components of market returns, we document a shift in the composition of idiosyncratic risk since the mid-2010s. Whereas idiosyncratic volatility previously reflected cross-firm comovement, it is now increasingly driven by the weighted variances of a small number of large firms. We show that this change is not explained by concentration alone, but by a reallocation of idiosyncratic risk toward dominant firms. As a result, aggregate volatility becomes more sensitive to firm-specific shocks at the top of the size distribution.

Suggested Citation

  • Simone Alfarano & Omar Blanco-Arroyo, 2026. "Granular Stock Market," Working Papers 2608, Department of Applied Economics II, Universidad de Valencia.
    • Handle: RePEc:eec:wpaper:2608
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    More about this item

    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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