Covariance Risk and Employment Growth in Canadian Cities

Abstract

The Capital Asset Pricing Model is used to examine the relationship between covariance risk in employment and growth in employment for Canadian census metropolitan areas. A new version of location quotient (LQ) is presented that is based on covariance risk. This risk quotient is shown to be a better predictor of employment growth than the simple LQ. The portfolio theoretic model and covariance risk are shown to be useful in predicting growth in addition to studying the regional stability of employment. Copyright 2006 Blackwell Publishing.

Location quotient and trade

“…Mizuno et al (2006) expressed that the LQ should be a better index to investigate the regional unemployment issue. Penfold (2006) argued that the LQ can be derived from portfolio theory and capital asset pricing model to obtain extra insight into the sensitivity of regional economy to changes in the national market. In econometric estimation, LeSage and Reed (1989) proposed a vector autoregressive model to estimate the effects of base employment on regional employment through the LQ.…”