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The Structure of Social Risk

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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.

Suggested Citation

  • William D. Nordhaus & Steven N. Durlauf, 1982. "The Structure of Social Risk," Cowles Foundation Discussion Papers 648, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:648
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d06/d0648.pdf
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    1. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-227, May.
    2. 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.
    3. Rajnish Mehra & Edward C. Prescott, 1982. "A test of the intertemporal asset pricing model," Staff Report 81, Federal Reserve Bank of Minneapolis.
    4. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    5. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    6. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    7. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-455, July.
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    Cited by:

    1. Jeffrey A. Frankel and William T. Dickens., 1983. "Are Asset-Demand Functions Determined by CAPM?," Research Program in Finance Working Papers 140, University of California at Berkeley.
    2. Jeffrey A. Frankel, 1983. "A Test of Portfolio Crowding-Out and Related Issues in Finance," NBER Working Papers 1205, National Bureau of Economic Research, Inc.

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