Aggregate and Firm level volatility: the role of acquisitions and disposals

Devonald, L, Higson, C J and Holly, S (2017) Aggregate and Firm level volatility: the role of acquisitions and disposals. Working Paper. Cambridge Working Papers in Economics: 1748, Cambridge.

Abstract

The purpose of this paper is to revisit an intriguing finding. Although over the last few decades leading up to the financial crisis there was a marked reduction in the volatility of aggregate output and inflation, there appears to have been a corresponding increase in the sales volatility of individual firms. Here we argue that a significant reason for this apparent increase in firm level volatility was an increase in churning of firm activity through the acquisition and disposal of businesses. This created an increase in observed negative covariances between firms, so even if the volatility of underlying organic growth has also fallen, observed volatility has risen.