The G-Spread: A Business-Economics-Based Measure of Permanent Capital Loss Risk

Suresh, Karthik Ramakrishna (2026): The G-Spread: A Business-Economics-Based Measure of Permanent Capital Loss Risk. Published in:

Abstract

This paper introduces the G-spread, a measure of permanent capital loss risk offered as an alternative to the price-based metrics that dominate contemporary finance: the Capital Asset Pricing Model, Value-at-Risk, beta, standard deviation, and the Fama-French multi-factor model. The G-spread quantifies the return a business earns above its weighted average cost of capital after accounting for reinvestment requirements, incorporating a terminal-growth adjustment calibrated to an AI-era operating environment. The central argument is epistemological: price-based models measure volatility, whereas the risk that matters to long-horizon equity investors is the permanent loss of capital. Because the two are weakly correlated, volatility-based models can misclassify structurally sound businesses as risky and structurally fragile ones as safe. Using eleven worked examples from Indian equity markets and a 227-company retrospective study spanning India, the United States, China, and Japan, the paper tests whether the G-spread identifies the direction of long-run value creation and destruction more reliably than the price-based benchmarks. Across the four markets, holdings flagged EXCLUDED by the financial-health gates returned an average of −12.9% per year, beating the benchmark in only 2% of cases, while holdings classified LOW RISK delivered average excess returns of 10.8 percentage points above the benchmark, beating it 93% of the time. The findings suggest that grounding risk measurement in business economics rather than price behaviour better captures the loss exposure long-term investors actually bear.

• Item Type: MPRA Paper
• Language: English
• Keywords: permanent capital loss, risk measurement, weighted average cost of capital, reinvestment, terminal growth, CAPM, value-at-risk, Fama-French, value investing, Indian equities, cross-market study
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

References

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