Risk analysis of Spanish companies

Abstract

This paper aims to investigate the determinants of different types of market riskfaced by Spanish firms from 2012 to 2019. Using Fama and French's (Journalof Financial Economics, 1993, 33, 3) three-factor model, we estimate total risk,diversifiable risk, and systematic or non-diversifiable risk in the three dimen-sions proposed by these authors: market risk, size risk, and valuation risk. Riskdeterminants are derived from a series of economic and financial variables ob-tained from the information contained in financial statements. This informationis summarised using a factor analysis that aims to resolve the correlation issuesbetween the proposed measures. The study demonstrates that the systematicrisk factors proposed by Fama and French in their 1993 three-factor model in-corporate dimensions of systematic risk that are relevant to investors and thatthe set of economic and financial variables proposed can explain these risks.Among these variables, profitability and the market to book ratio have the great-est impact in explaining company risk, while factors such as operating and fi-nancial leverage, growth, or company insolvency have a much smaller effect asexplanatory factors for risk.