On December 12, 2019, Fed in Print will introduce its new platform for discovering content. Please direct your questions to Anna Oates

Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Philadelphia
Working Papers
Market exposure and endogenous firm volatility over the business cycle
Ryan Decker
Pablo D'Erasmo
Herman J. Moscoso Boedo
Abstract

First Draft: November 1, 2011 We propose a theory of endogenous firm-level volatility over the business cycle based on endogenous market exposure. Firms that reach a larger number of markets diversify market-specific demand risk at a cost. The model is driven only by total factor productivity shocks and captures the business cycle properties of firm-level volatility. Using a panel of U.S. firms (Compustat), we empirically document the countercyclical nature of firm-level volatility. We then match this panel to Compustat’s Segment data and the U.S. Census’s Longitudinal Business Database (LBD) to show that, consistent with our model, measures of market reach are procyclical, and the countercyclicality of firm-level volatility is driven mostly by those firms that adjust the number of markets to which they are exposed. This finding is explained by the negative elasticity between various measures of market exposure and firm-level idiosyncratic volatility we uncover using Compustat, the LBD, and the Kauffman Firm Survey.


Download Full text
Cite this item
Ryan Decker & Pablo D'Erasmo & Herman J. Moscoso Boedo, Market exposure and endogenous firm volatility over the business cycle, Federal Reserve Bank of Philadelphia, Working Papers 14-12, 24 Mar 2014.
More from this series
JEL Classification:
Subject headings:
Keywords: Endogenous idiosyncratic risk; Business cycles; Market exposure
For corrections, contact Beth Paul ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal