Volatility and Diversification of Exports: Firm-Level Theory and Evidence

41 Pages Posted: 21 Aug 2014

See all articles by Gonzague Vannoorenberghe

Gonzague Vannoorenberghe

Tilburg University

Zheng Wang

De Montfort University; GEP, University of Nottingham

Zhihong Yu

University of Nottingham - Leverhulme Centre for Research on Globalisation and Economic Policy (GEP)

Date Written: July 31, 2014

Abstract

We show using detailed firm-level Chinese data that, among small exporters, firms selling to a more diversified set of countries have more volatile exports, while the opposite holds among large exporters. This result, which stands in marked contrast to standard portfolio theory for small exporters, is robust to a wide array of specifications and controls. Our theoretical explanation for these observations rests on the presence of fixed costs of exports per destination and short-run demand shocks. In this setup, the volatility of a firm’s exports depends not only on the diversification of its destination portfolio but also on whether it exports permanently to all markets. Among small exporters, a more diversified pool of destinations makes the firm more likely to export occasionally to some markets, thereby raising volatility. These results cast doubt on the commonly held belief that diversification must decrease volatility.

Keywords: volatility, diversification exports

JEL Classification: F100

Suggested Citation

Vannoorenberghe, Gonzague and Wang, Zheng and Yu, Zhihong, Volatility and Diversification of Exports: Firm-Level Theory and Evidence (July 31, 2014). CESifo Working Paper Series No. 4916, Available at SSRN: https://ssrn.com/abstract=2483640

Gonzague Vannoorenberghe

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Zheng Wang

De Montfort University ( email )

Department of Economics and Marketing
The Gateway
Leicester, LE1 9BH
United Kingdom

HOME PAGE: http://zhengwang.weebly.com/

GEP, University of Nottingham ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

Zhihong Yu (Contact Author)

University of Nottingham - Leverhulme Centre for Research on Globalisation and Economic Policy (GEP) ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

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