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
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: Suggested Citation