Profits: Mean Diverting with High Volatility

Abstract

Even though the behavior of the U.S. profit growth varies over the economic cycle that variation itself drives investor behavior and asset prices. We raise three fundamental questions which are; first, does profit growth over time exhibit a mean-reverting behavior? Second, how volatile are profits and does this volatility obscure the message of profit growth? Finally, do profit growth rates vary between decades/ sub-samples? Our efforts suggest that since 1970 the mean and standard deviation of profit growth had actually been decreasing up until 1990s. For the most recent (2000-08) period, the profit growth shows an up-tick in both the mean and the standard deviation. For the entire period, 1970-2008, we find that the trend coefficient is statistically insignificant. We apply the traditional unit root tests, efficient unit root tests, and unit root tests with structural break on the profits series. In addition, we follow Hamilton's approach and apply an ARCH approach on the profits series. Our empirical findings are consistent with the Schumpeter's view, mean-diversion with a possibility of deviation from long-run trend growth. In addition to the factors introduced by Schumpeter there may be some exogenous shocks which could alter the long-run path of the profits.

The dynamics of company profits: A latent growth model

“…They found that companies exhibited different and significant performance trends, suggesting a variety of evolutionary structures extending well beyond the standard mean-reverting process in autoregressive models. Silvia and Iqbal (2011) also found evidence of a growth trend and structural breaks in the aggregate profit series of US companies. They argued that in a Schumpeterian world, deviations from equilibrium create rents that, once dissipated, do not bring the market back to the previous equilibrium but rather to a new one.…”

“…Companies permanently engage in processes, actions, and decisions that may influence their competitive position and that consequently may have an effect on the company’s expected profitability that goes beyond the idea of unsystematic shocks. Such an effect may be captured in a trend-based model (Cable and Jackson, 2008; Silvia and Iqbal, 2011)…”

Mercados cambiarios y tipos de cambio de Asia y Latinoamérica: sincronización de largo plazo, cambios estructurales y choques estocásticos

“…Estadísticamente, la prueba ZA ha sido criticada porque suele indicar la presencia de quiebres inexistentes, i.e. -quiebres espurios‖ (Silvia e Iqbal, 2011). Por esta razón, el análisis de cambio estructural se complementa con estimaciones de la prueba de raíz unitaria Kim-Perron (KP).…”