The Structure of Social Risk
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 — 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.
Nordhaus, William D. and Durlauf, Steven N., "The Structure of Social Risk" (1982). Cowles Foundation Discussion Papers. 882.