To read the full version of this content please select one of the options below:

The impact of the global financial crisis on firm‐level risk of the S&P 500

Anthony Loviscek (Department of Finance, Seton Hall University, South Orange, New Jersey, USA)
Elven Riley (Department of Finance, Seton Hall University, South Orange, New Jersey, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 7 June 2013

Downloads
994

Abstract

Purpose

This paper aims to assess the impact of the global financial crisis of 2007‐09 on the risk structure of S&P 500 firms by examining their market, active, and residual risks before and during the crisis.

Design/methodology/approach

The classic one‐factor model is estimated for each firm in the S&P 500 to decompose risk into market, active, and residual components. Five sets of regression estimates based on monthly return data are used: 2002‐06, 2003‐07, 2004‐08, 2005‐09, and 2006‐10. The estimates provide insight into the risk structure of S&P 500 firms before and during the crisis.

Findings

The average correlation coefficient between S&P 500 firms rose during the crisis from 0.20 to 0.35, an increase of 75 percent. Although the results indicate that active and residual risks are significant across the firms and across the periods, the impact of the financial crisis was mostly on market risk. The increase in risks was pronounced for financial firms, especially insurance companies, and industrial firms, especially “hard” manufacturing.

Research limitations/implications

Because the study focuses on the global financial crisis of 2007‐09, researchers should be careful about generalizing the results to the post‐crisis period.

Practical implications

Investors should be aware that equity portfolio risk reduction during major crises can be hard to achieve because the average correlation coefficient between stock returns may rise significantly, crimping the efficacy of diversification.

Originality/value

It was very difficult for equity investors to shield themselves from the risk associated with the global financial crisis of 2007‐09.

Keywords

Citation

Loviscek, A. and Riley, E. (2013), "The impact of the global financial crisis on firm‐level risk of the S&P 500", Managerial Finance, Vol. 39 No. 7, pp. 641-652. https://doi.org/10.1108/03074351311323437

Publisher

:

Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited