Risk analysis of Spanish companies

Abstract

This paper aims to investigate the determinants of different types of market risk faced by Spanish firms from 2012 to 2019. Using Fama and French's (Journal of Financial Economics, 1993, 33, 3) three-factor model, we estimate total risk, diversifiable risk, and systematic or non-diversifiable risk in the three dimensions proposed by these authors: market risk, size risk, and valuation risk. Risk determinants are derived from a series of economic and financial variables obtained from the information contained in financial statements. This information is summarised using a factor analysis that aims to resolve the correlation issues between the proposed measures. The study demonstrates that the systematic risk factors proposed by Fama and French in their 1993 three-factor model incorporate dimensions of systematic risk that are relevant to investors and that the set of economic and financial variables proposed can explain these risks. Among these variables, profitability and the market to book ratio have the greatest impact in explaining company risk, while factors such as operating and financial leverage, growth, or company insolvency have a much smaller effect as explanatory factors for risk.