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Cross–Sectoral Variation in Firm–Level Idiosyncratic Risk

  • CASTRO, Rui
  • CLEMENTI, Gian Luca
  • LEE, Yoonsoo

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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File URL: https://papyrus.bib.umontreal.ca/xmlui/handle/1866/4229
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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2010-07.

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Length: 29 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:mtl:montde:2010-07
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  1. 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.
  2. Timothy Dunne & John Haltiwanger & Kenneth R. Troske, 1996. "Technology and Jobs: Secular Changes and Cyclical Dynamics," NBER Working Papers 5656, National Bureau of Economic Research, Inc.
  3. Rui Castro & Gian Luca Clementi & Glenn Macdonald, 2009. "Legal Institutions, Sectoral Heterogeneity, and Economic Development," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 529-561.
  4. Grossman, Gene M & Helpman, Elhanan, 1991. "Quality Ladders and Product Cycles," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 557-86, May.
  5. Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
  6. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  7. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  8. 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.
  9. 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, June.
  10. Bils, Mark & Chang, Yongsung, 2000. "Understanding how price responds to costs and production," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 52(1), pages 33-77, June.
  11. Michelacci, Claudio & Schivardi, Fabiano, 2008. "Does Idiosyncratic Business Risk Matter?," CEPR Discussion Papers 6910, C.E.P.R. Discussion Papers.
  12. repec:ste:nystbu:05-20 is not listed on IDEAS
  13. 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.
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