Gonzague Vannoorenberghe (Tilburg University)

Volatility and Diversification of Exports: Theory and Evidence (with Zheng Wang and Zhihong Yu)

Abstract:

We show using detailed firm-level Chinese data that, among small exporters, firms selling to a more diversified set of countries have more volatile exports, while the opposite holds among large exporters. This result, which stands in marked contrast to standard portfolio theory for small exporters, is robust to a wide array of specifications and controls. Our theoretical explanation for these observations rests on the presence of destination-specific fixed costs of exports and short-run demand shocks. In this setup, the volatility of a firm’s exports depends on (i) the probability that an exporter sells each year to each of his destination markets (extensive margin) and (ii) the volatility of exports conditional on selling to a destination (intensive margin). For small exporters, diversification strongly decreases the extensive margin and raises volatility, while the opposite holds for large exporters. These results cast doubt on the common belief that export diversification decreases volatility.