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Cross–Sectoral Variation in Firm–Level Idiosyncratic Risk

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Author Info

  • Rui Castro

    ()
    (Department of Economics and CIREQ, Université de Montréal)

  • Gian Luca Clementi

    ()
    (Department of Economics, Stern School of Business, New York University and RCEA)

  • Yoonsoo Lee

    ()
    (Department of Economics, Sogang University and Federal Reserve Bank of Cleveland)

Abstract

We estimate firm–level idiosyncratic risk in the U.S. manufacturing sector. Our proxy for risk is the volatility of the portion of growth in sales or TFP which is not explained by either industry– or economy–wide factors, or firm characteristics systematically associated with growth itself. We find that idiosyncratic risk accounts for about 90% of the overall uncertainty faced by firms. The extent of cross–sectoral variation in idiosyncratic risk is remarkable. Firms in the most volatile sector are subject to at least three times as much uncertainty as firms in the least volatile. Our evidence indicates that idiosyncratic risk is higher in industries where the extent of creative destruction is likely to be greater.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 28_10.

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Date of creation: Jan 2010
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Handle: RePEc:rim:rimwps:28_10

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Related research

Keywords: Schumpeterian Competition; Creative Destruction; Product Turnover; R&D Intensity; Investment–Specific Technological Change;

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References

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  1. Mark Bils & Yongsung Chang, 1999. "Understanding How Price Responds to Costs and Production," NBER Working Papers 7311, National Bureau of Economic Research, Inc.
  2. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  3. Lucia Foster & John Haltiwanger & C.J. Krizan, 1998. "Aggregate Productivity Growth: Lessons from Microeconomic Evidence," NBER Working Papers 6803, National Bureau of Economic Research, Inc.
  4. Timothy Dunne & Kenneth R Troske & John Haltiwanger, 1996. "Technology and Jobs: Secular Changes and Cyclical Dynamics," Working Papers 96-7, Center for Economic Studies, U.S. Census Bureau.
  5. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
  6. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders and Product Cycles," NBER Working Papers 3201, National Bureau of Economic Research, Inc.
  7. Stephen Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2006. "Volatility and Dispersion in Business Growth Rates: Publicly Traded Versus Privately Held Firms," Working Papers 06-17, Center for Economic Studies, U.S. Census Bureau.
  8. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
  9. CASTRO, Rui & CLEMENTI, Gian Luca & MACDONALD, Glenn, 2009. "Legal Institutions, Sectoral Heterogeneity, and Economic Development," Cahiers de recherche 09-2009, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  11. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, December.
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  13. repec:ste:nystbu:05-20 is not listed on IDEAS
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Cited by:
  1. Emmanuel De Veirman & Andrew T. Levin, 2011. "Cyclical Changes in Firm Volatility," CAMA Working Papers 2011-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Pablo N D’Erasmo & Hernan J Moscoso-Boedo, 2011. "Intangibles and Endogenous Firm Volatility over the Business Cycle," Virginia Economics Online Papers 400, University of Virginia, Department of Economics.
  3. Alain Gabler & Markus Poschke, 2013. "Experimentation by Firms, Distortions, and Aggregate Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 26-38, January.
  4. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," 2011 Meeting Papers 484, Society for Economic Dynamics.
  5. di Giovanni, Julian & Levchenko, Andrei A. & Mejean, Isabelle, 2012. "Firms, Destinations, and Aggregate Fluctuations," CEPR Discussion Papers 9168, C.E.P.R. Discussion Papers.
  6. Decker, Ryan & D'Erasmo, Pablo & Moscoso Boedo, Herman J., 2014. "Market exposure and endogenous firm volatility over the business cycle," Working Papers 14-12, Federal Reserve Bank of Philadelphia.
  7. Markus Poschke & Alain Gabler, 2011. "Growth through Experimentation," 2011 Meeting Papers 643, Society for Economic Dynamics.
  8. Hernan Moscoso Boedo & Pablo D'Erasmo, 2011. "Entrepreneurship and Endogenous Volatility," 2011 Meeting Papers 901, Society for Economic Dynamics.
  9. Kevin Donovan, 2011. "Risk, Farm Ownership, and International Productivity Differences," 2011 Meeting Papers 1088, Society for Economic Dynamics.

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