LQG 2025/02/11 – 18:30 – Equity Prices in a Granular Economy – Harjoat Bhamra – IP *OLO* Hybrid

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The asset pricing in a granular economy. A few firms are exceedingly large. Results: reduced diversification across stocks and heightened aggregate risk.

LQG 2025/02/11 – 18:30 – Equity Prices in a Granular Economy – Harjoat Bhamra – IP *OLO* Hybrid

Seminar by Harjoat Bhamra

2025/02/11 – In-Person and On-Line

The LQG is very grateful to our hosts of this LQG event.

This paper explores the asset pricing implications of a granular economy, where a few firms are exceedingly large (the size of ’grains’). We present three new findings that support the idea that a more granular economy may be detrimental to investors, due to reduced diversification across stocks and heightened aggregate risk. First, the slope of the Security Market Line (SML) exhibits a negative relationship with the level of granularity. Second, the betting-against-beta (BAB) strategy performs well only during times of increased granularity, aligning with the SML’s decreasing slope. Third, exposure to granularity is negatively priced, indicating that stocks performing well during increased granularity offer protection against diversification risk, thereby providing lower returns. These results underscore the critical role of granularity in understanding vital aspects of equity markets.

The paper on which this seminar will be based is available here.

Harjoat Bhamra

Professor at Imperial College Business School

Harjoat Bhamra is a Professor in Finance at Imperial College Business School. He holds an MA and MMath in Mathematics from St John’s College, Cambridge University and a PhD from London Business School. Prior to joining Imperial, he was an Associate Professor at the Sauder School of Business at the University of British Columbia. His research focuses on financial markets, especially the importance of household heterogeneity for asset returns and the interconnections between asset prices, corporate financial decisions, and monetary policy. He has held visiting positions at École polytechnique fédérale de Lausanne and Goethe University, Frankfurt. He is a Research Fellow at CEPR, an Associate at the Centre for Macroeconomics at the London School of Economics and Political Science, and an Associate Editor at Management Science.