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Market-Based Solutions to Vital Economic Issues
Research
Aug 1, 2015

How Important Is Financial Risk?

Abstract

We explore the determinants of equity price risk of nonfinancial corporations. Operating and asset characteristics are by far the most important determinants of risk. For the median firm, financial risk accounts for only 15% of observed stock price volatility. Furthermore, financial risk has declined over the last 3 decades, indicating that any upward trend in equity volatility was driven entirely by economic risk factors. This explains why financial distress (as opposed to economic distress) was surprisingly uncommon in the nonfinancial sector during the 2007–2009 crisis even as measures of equity volatility reached unprecedented highs.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals. 


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