Stock Market Downturn and Stock Market Concentration

Abstract

As an important component of corporate inequality, stock market concentration has become a focus of attention in academia in recent years. However, existing literature focuses on its negative consequences, and research on the determinants of stock market concentration is scarce. This paper investigates for the first time how stock market downturns affect stock market concentration. Using data on stock markets in both the United States and China, we find a negative correlation between market-wide returns and stock market concentration. To address endogeneity and establish causal inference, we exploit two natural experiments: the COVID-19 pandemic and the subprime crisis. We find that stock market concentration increases during these crises, and we also find some heterogeneity between the United States and China. Our findings have important policy implications regarding inequality during market downturns.