Measuring Changes in Firm-Level Volatility: An Application to Japan

This paper develops a new technique for estimating earnings and employment volatility at the firm level, and applies it to Japanese firms. Unlike earlier studies for the United States, we estimate instantaneous volatility for every year, rather than a rolling ten-year average of volatility. In addition, our technique allows us to estimate the firm-specific component of firm volatility separately, by controlling for variation in firms’ earnings and employment growth induced by aggregate and sectoral factors. We find that firm-specific sales volatility was substantially higher before the 1990 stock market crash than in the following fifteen years. The conditional variance of earnings and employment growth stayed relatively constant until the late 1990s, but increased substantially from 1999 onwards.