[quote=davelj][quote=patientrenter]
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.[/quote]
This is an interesting data point although I’m not sure if this difference is meaningful from the perspective of a debt holder. It might be – but it might not be. For example, I would be surprised if the difference in the standard deviation of earnings for all AA-rated companies averaged less than 450 bps. (Let’s put aside what the value of a AA rating is for the moment.) And yet they all face similar borrowing costs. My point being that when you’re a debt holder – as opposed to an equity holder – you will assign the same rating (or rate) to companies (people) with varying earnings volatility (within a range) because you’re senior to most of the capital structure. But I agree that if these numbers are correct (and I have no reason to believe they aren’t) then there should be some higher rate assigned to self-employed folks all else being equal. But should it be 10 bps or 100 bps? Probably closer to the former than the latter using my AA analogy. Some premium? Yes. A big one? Perhaps, but there’s not enough information to know.
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davelj, the std dev numbers I gave are for the economy-wide aggregates for that portion of national income. For any one individual, the variation would be greater.
As for the calibration of risk charges on personal residence loans against corporate bond risk premia – well, I am curious, but I think it needs a bit more work. Amongst all non-recourse 80%+ CLTV loans on homes for business owners, the variation in the value of the collateral is small compared to the variation in protections amongst AA corporate bonds, and the protective value is probably less on average. So I am not coming to a small risk premium for the home loans right away.
More anecdotally, I have to deal with some segments of our own business that are exclusively driven by small business owners, and those segments do seem more prone to boom and bust. Well, I am East Coast, so I’ll call it a night.
