A Simple Test of the ‘Risk Class Hypothesis’

Robert Faff, R D Brooks and H Y Kee

Studies in Economics and Econometrics, 2005, vol. 29, issue 1, 83-96

Abstract: In this paper we formally test the assumption of equal intra-industry systematic business risk, which we term the ‘risk class hypothesis'. For the purposes of our analysis we define risk classes around four-digit SIC stock groupings. In general the ‘risk class hypothesis' is not supported across our sample of US stocks. While this finding does not mean that all applications of the ‘risk class' approach are inevitably flawed, it does suggest that in future we should think very carefully before blindly invoking such risk equality assumptions.

Date: 2005
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DOI: 10.1080/10800379.2005.12106382

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