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Cross–Sectoral Variation in Firm–Level Idiosyncratic Risk

  • 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)

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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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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