Co-movement of revenue: structural changes in the business cycle

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.

No contagion, only globalization and flight to quality

“…In this paper, we follow Forbes and Rigobon (2002) who define contagion as "significant increase in cross-market linkages after a shock." Some authors claim that contagion is driven by fundamentals (Erdorf and Heinrichs, 2011;Kodres and Pritsker, 2002), while others view contagion as created by over-reactions (Broner et al, 2006;Goldstein and Pauzner, 2004). The definition proposed by Forbes and Rigobon (2002) is wide enough to cover both possibilities.…”

Hodrick-Prescott filtering of Large, emerging Economies and Analysis of Russian GDP Growth

“…One of the hottest topics is the issue of stimulating growth and increasing efficiency in the global economy (Boldrin et al 2001, Coudert et al 2011, Lee 1996; much attention has been directed towards the issue of developed and developing countries' economic cycles having a mutual impact on each other (Das 2010, Imbs 2004, Rose and Engle 2002, especially in terms of overcoming gaps in production output. Before the 2009 crisis, at a time when the economies of the Asia-Pacific region were developing markedly and the price of raw materials was climbing constantly (Erdorf and Heinrichs 2011, Sharma 2011, Yetman 2011, the decoupling hypothesis (about the economic cycles of developing countries becoming more separated from those of developed countries) became very relevant (Kose et al 2008). However, since the 2009 crisis, several articles have appeared asserting a decrease or disappearance of the decoupling effect after the crisis (Dimitriou et al 2013, Wälti 2012, although there are still some noting the effectʼs presence (Dooley andHutchison 2009, Gilenko andFedorova 2014).…”