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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.

Suggested Citation

  • 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.
  • Handle: RePEc:een:camaaa:2011-29
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    Cited by:

    1. repec:bla:jecrev:v:68:y:2017:i:2:p:158-172 is not listed on IDEAS
    2. 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.
    3. Claudia M Buch & Manuel Buchholz & Lena Tonzer, 2015. "Uncertainty, Bank Lending, and Bank-Level Heterogeneity," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(4), pages 919-954, November.
    4. Manuel Buchholz & Lena Tonzer & J. Berner, 2016. "Asymmetric Investment Responses to Firm-specific Uncertainty," IWH Discussion Papers 7, Halle Institute for Economic Research.
    5. YoungGak KIM & Hyeog Ug KWON, 2012. "Aggregate and Firm-Level Volatility in the Japanese Economy," Discussion papers 12030, Research Institute of Economy, Trade and Industry (RIETI).
    6. Roberta Distante & Ivan Petrella & Emiliano Santoro, 2013. "Asymmetry Reversals and the Business Cycle," Working Papers 2013.54, Fondazione Eni Enrico Mattei.
    7. Paula Garda & Volker Ziemann, 2014. "Economic Policies and Microeconomic Stability: A Literature Review and Some Empirics," OECD Economics Department Working Papers 1115, OECD Publishing.
    8. De Veirman, Emmanuel & Levin, Andrew T., 2012. "When did firms become more different? Time-varying firm-specific volatility in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(4), pages 578-601.
    9. repec:zbw:iwhdps:7-16 is not listed on IDEAS
    10. Robert Faff & Steven Cahan, 2013. "Mickey Mouse and the IDioT principle for assessing research contribution: discussion of ‘Is the relationship between investment and conditional cash flow volatility ambiguous, asymmetric or both?’," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(4), pages 949-960, December.
    11. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2013. "Risk Shocks," NBER Working Papers 18682, National Bureau of Economic Research, Inc.
    12. Buchholz, Manuel & Tonzer, Lena & Berner, Julian, 2016. "Asymmetric Investment Responses to Firm-specific Uncertainty," IWH Discussion Papers 7/2016, Halle Institute for Economic Research (IWH).

    More about this item

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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