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Cyclical Changes in Firm Volatility

49 Pages Posted: 3 Sep 2011  

Emmanuel de Veirman

De Nederlandsche Bank

Andrew T. Levin

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2011


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.

Keywords: firm-level volatility, business cycles, output-inflation trade-off

JEL Classification: C33, D22, E31, E32

Suggested Citation

de Veirman, Emmanuel and Levin, Andrew T., Cyclical Changes in Firm Volatility (August 25, 2011). Available at SSRN: or

Emmanuel de Veirman (Contact Author)

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam

Andrew Levin

affiliation not provided to SSRN

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