University of Cincinnati Lindner College of Business

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Market Exposure and Endogenous Firm Volatility over the Business Cycle

Author(s): Hernan Moscoso Boedo, Pablo D'Erasmo, Ryan Decker

Status: Published
Year: 2016
Publication Name: American Economic Journal: Macroeconomics
Volume: 8, Issue: 1, Page Number(s): 148-198


We propose a theory of endogenous firm-level risk over the business cycle based on endogenous market exposure. Firms that reach a larger number of markets diversify market-specific demand shocks at a cost. The model is driven only by total factor productivity shocks and captures the observed countercyclity of firm-level risk. Using a panel of US firms we show that, consistent with our theoretical model, measures of market reach are procyclical, and the countercyclicality of firm-level risk is driven by those firms that adjust their market exposure, which are larger than those that do not.


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