Firm-Level Instruments Instruments
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Firm-by-year uncertainty instruments from 1992 for US CRSP-Compustat firms developed by Iván Alfaro (BI Norwegian Business School), Nicholas Bloom (Stanford Economics), and Xiaoji Lin (Minnesota Carlson School).
In The Finance Uncertainty Multiplier, Alfaro, Bloom, and Lin (ABL) develop firm-level instruments to address endogeneity concerns in measuring the causal impact of uncertainty shocks. Their identification strategy exploits industry differential exposure to 9 different sources of aggregate uncertainty to identify exogenous variation in firm-level volatility.
The firm-level uncertainty instruments include the second moment exposures to 7 bilateral exchange rates with the US Dollar (Euro, Canadian Dollar, Japanese Yen, British Pound, Swiss Franc, Australian Dollar, and Swedish Krona, which are considered "Major Currencies" by the US Fed Board), crude-oil prices, and Economic Policy Uncertainty. The dataset contains all 9 second-moment instruments and their respective first-moment controls from 1992. The sample of firms is for publicly listed US firms with data available in Compustat and CRSP. ABL's dataset provides different firm identifiers, including Compustat Gvkey, CRSP Permno and Permco, CUSIP, and TICKER codes. Codes for 2-digit Standard Industrial Classifications are also included. The instruments can also be used as industry-level instruments for uncertainty that can be applied to, for example, industry, private firm, or establishment datasets. The set of instruments are constructed using the realized volatilities of the 9 different aggregate sources of uncertainty.
ABL's dataset includes 2 firm-level proxies for uncertainty: 1) realized stock return volatility from CRSP and 2) forward-365-day option-implied volatility from OptionMetrics, where annual firm realized volatility is estimated as the annualized 12-month standard deviation of daily CRSP returns and implied volatility is a forward 365-day implied volatility measure built from of a mix of put and call at-the-money options. For both the realized and option-implied volatilities ABL provide: 1) annual growth rates from one year to the next (i.e., shocks to firm-level volatilities as described in the baseline measures in the paper) and 2) levels. The latter is provided for researchers wanting the level of firm volatility instead of the shock. The instruments can be used for either the shock or level of firm volatility measures.
The dataset should be cited as: Alfaro, Ivan, Nicholas Bloom, and Xiaoji Lin, The Finance Uncertainty Multiplier (2021). Available at SSRN. In case of questions, please contact Iván Alfaro.