Volatility and Risk Dynamics in Indian Large-cap and Small-cap Indices: A GARCH-family Approach for Investor Suitability Assessment

Abstract

This study aims to analyse the volatility and risk dynamics of different capitalisation indices, that is, large-cap and small-cap indices, in the domestic stock market. This research employs the GARCH, EGARCH and GJR-GARCH framework to look closely into the volatility characteristics of the large-cap and small-cap indices, specifically represented by the National Stock Exchange NIFTY-50 for Large-cap and NIFTY Small-Cap-100 for the Small-cap indices, over a decade-long period from 1 January 2015 to 31 December, 2025, utilising the daily closing prices of these indices. The stationarity of the time-series data is assessed through the ADF test. Subsequently, GARCH-family models are utilised to investigate volatility persistence, clustering effects and asymmetric reactions to positive and negative market shocks for each index. The asymmetric EGARCH(1,1) framework offers a more robust statistical fit for both market categories. The large-cap sector is characterised by considerable persistence in variance, indicating that past shocks diminish gradually over time. In contrast, the small-cap sector is highly vulnerable to immediate informational shocks, yet its risk memory is more short-lived. In addition, both market segments show a significant leverage effect: small caps respond asymmetrically to unfavourable news at roughly twice the level observed for large caps. The research offers significant insights into the volatility features associated with large-cap and small-cap investments within the domestic setting. By examining the volatility profiles of the large-cap and small-cap indices, it supports investors, policymakers and academics in understanding the challenges involved in risk management.