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Cyclical Changes in Firm Volatility

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  • Emmanuel De Veirman

    ()

  • Andrew T. Levin

    ()

Abstract

We estimate changes in the volatility of firm-level sales, earnings and employment growth of US firms. Our method differs from existing measures for firm-level sales and employment volatility in that it not only captures longer-run changes in volatility, but also measures cyclical changes in firm volatility. We detect substantial cyclical variation in firm-specific volatility around trend. Firm-specific volatility was low in the early 1990s, rose in the mid- and late-1990s, and was high around 2000. Our results are consistent with the hypothesis, deduced from models with financial frictions, that rising idiosyncratic volatility before 2001 contributed to the coincident rise in the external finance premium and to the 2001 recession. Endogenous pricing models imply that price adjustment is less frequent, and disinflation more costly, when firm-specific volatility is low. Consistent with endogenous pricing models, we find that the output cost of disinflation was three times larger in the early 1990s than in the early 2000s.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2011-29.

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Length: 49 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:een:camaaa:2011-29

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Cited by:
  1. Calmès, Christian & Théoret, Raymond, 2014. "Bank systemic risk and macroeconomic shocks: Canadian and U.S. evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 388-402.
  2. Emmanuel de Veirman & Andrew Levin, 2012. "When Did Firms Become More Different? Time-Varying Firm-Specific Volatility in Japan," DNB Working Papers 351, Netherlands Central Bank, Research Department.
  3. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2013. "Risk Shocks," NBER Working Papers 18682, National Bureau of Economic Research, Inc.
  4. Roberta Distante & Ivan Petrella & Emiliano Santoro, 2013. "Asymmetry Reversals and the Business Cycle," Working Papers 2013.54, Fondazione Eni Enrico Mattei.

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