Size matters: capital market size and risk-return profiles

摘要

We propose a simple approach to assess the impact of capital market size on the risk/ return profile of capital markets. The thought motivating the study is that markets of different size ought to behave differently even when they are composed of agents whose risk attitudes are all alike. Smaller, or shallower, markets are less able to pool and spread risks than are deeper markets and we might expect this to be reflected in the observed risk/return profiles of capital markets of differing size. However, when the marginal return per additional unit of risk decreases, the larger market is able to absorb a higher level of risk but may also experience a lower mean return in aggregate than the smaller market. Subsidies to foster venture capital funds subscribing risks in new ventures and R&D in small-to-medium sized capital markets such as Australia are not necessarily displaced by lower ability to subscribe risky ventures of a small market.