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Co-Movement of Revenue: Structural Changes in the Business Cycle

Financial Markets and Portfolio Management, Vol. 25, No. 4, pp. 411-433, 2011

Posted: 7 Dec 2011  

Stefan Erdorf

University of Cologne - Graduate School of Risk Management

Nicolas Heinrichs

University of Cologne - Graduate School of Risk Management

Date Written: October 5, 2011

Abstract

The co-movement of revenue growth across different industries changes over the business cycle. Using a large sample of quarterly firm revenues, aggregated to industry data from 1969 to 2009, we demonstrate that the correlation is the highest during a crisis. Our findings of structural changes in correlation have implications for diversification decisions in portfolio analysis and risk management. The higher correlation in crisis periods increases the downside risk and bankruptcy probability of business portfolios. We test the hypothesis that average correlations are significantly different, by applying permutation and bootstrap techniques. As robustness checks, both correlations between industries and the aggregate market and correlations between earnings confirm our findings.

Keywords: correlation, business cycle, revenue, earnings, crisis, bootstrap, permutation test

JEL Classification: C12, E32, G11, M49

Suggested Citation

Erdorf, Stefan and Heinrichs, Nicolas, Co-Movement of Revenue: Structural Changes in the Business Cycle (October 5, 2011). Financial Markets and Portfolio Management, Vol. 25, No. 4, pp. 411-433, 2011 . Available at SSRN: https://ssrn.com/abstract=1969332

Stefan Erdorf (Contact Author)

University of Cologne - Graduate School of Risk Management ( email )

Albertus-Magnus-Platz
Cologne, D-50923
Germany

Nicolas Heinrichs

University of Cologne - Graduate School of Risk Management ( email )

Albertus-Magnus-Platz
Cologne, D-50923
Germany

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