New Economics Papers
on Risk Management
Issue of 2006‒06‒03
two papers chosen by

  1. Where is beta going ? the riskiness of value and small stocks By Franzoni, Francesco
  2. Proprietary Income, Entrepreneurial Risk, and the Predictability of U.S. Stock Returns By Mathias Hoffmann

  1. By: Franzoni, Francesco
    Abstract: This paper finds that the market betas of value and small stocks have decreased by about 75% in the second half of the twentieth century. The decline in beta can be related to a long-term improvement in economic conditions that made these companies less risky.
    Keywords: value; stocks; beta; risk; financial market
    JEL: D40 G10
    Date: 2006–01–09
  2. By: Mathias Hoffmann
    Abstract: Small businesses tend to be owned by wealthy households. Such entrepreneur households also own a large share of U.S. stock market wealth. Fluctuations in entrepreneurs’ hunger for risk could therefore help explain time variation in the equity premium. The paper suggests an entrepreneurial distress factor that is based on a cointegrating relationship between consumption and income from proprietary and non-proprietary wealth. I call this factor the cpy residual. It reflects cyclical fluctuations in proprietary income, is highly correlated with cross-sectional measures of idiosyncratic entrepreneurial risk and has considerable forecasting power for U.S. stock returns. In line with the theoretical mechanism, the correlation between cpy and the stock market has been declining since the beginning of the 1980s as stock market participation has widened and as entrepreneurial risk has become more easily diversifiable in the wake of U.S. state-level bank deregulation.
    Keywords: non-insurable background risk, entrepreneurial income, equity risk premium, long-horizon predictability
    JEL: E21 E31 G12
    Date: 2006

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