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The Structure of Social Risk

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Author Info
William D. Nordhaus () (Cowles Foundation, Yale University)
Steven N. Durlauf

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Abstract

It is increasingly recognized that the structure of financial risks interacts with economic or fundamental risks in a way that influence real economic outcomes. Recent work documents, on the one hand, the apparent excessive sensitivity of financial markets to economic shocks (see especially Shiller (1979)); and on the other hand the close dependence of investment and economic variables on financial variables. One of the central developments to analyze such interactions has been portfolio theory, particularly the capital asset pricing model (CAPM). This field has been extremely fertile, and has seen an outpouring of both theoretical and empirical work. Unfortunately, virtually all the work has been directed at a very narrow set of concerns -ñ stock market performance. Thus virtually every major firm has been extensively studied and has its own "beta" estimates from numerous beta vendors. To our knowledge, however, there has been no attempt to apply these tools to the economy as a whole. The present paper is a preliminary attempt to make such estimates. The first section develops the theory; the second outlines the data; the third presents the estimates; while the last turns to the implications.

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File URL: http://cowles.econ.yale.edu/P/cd/d06a/d0648.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 648.

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Length: 28 pages
Date of creation: 1982
Date of revision:
Handle: RePEc:cwl:cwldpp:648

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References listed on IDEAS
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  1. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September. [Downloadable!] (restricted)
  2. S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers 18-80, Wharton School Rodney L. White Center for Financial Research.
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  3. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December. [Downloadable!] (restricted)
  4. Rajnish Mehra & Edward C. Prescott, 1982. "A test of the intertemporal asset pricing model," Staff Report 81, Federal Reserve Bank of Minneapolis. [Downloadable!]
  5. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," Journal of Business, University of Chicago Press, vol. 45(3), pages 444-55, July. [Downloadable!] (restricted)
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Cited by:
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  1. Jeffrey A. Frankel & William T. Dickens, 1986. "Are Asset Demand Functions Determined by CAPM?," NBER Working Papers 1113, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Jeffrey A. Frankel, 1986. "A Test of Portfolio Crowding-Out and Related Issues in Finance," NBER Working Papers 1205, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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