Interindustry Covariance Patterns: Too Unstable for Portfolio Variance Analysis to be a Useful Tool?

Abstract

Instability in the local economy has long been a problem that local policy makers have sought to remedy, typically through diversification of the industrial base. Since the mid-1970s, portfolio variance analysis has held promise as a tool to assist regional policymakers in selecting target industries that would help stabilize the local cycle. However, this approach typically makes use of patterns in historical data to identify stabilizing industries, involving the implicit—and fundamental—assumption that past interindustry patterns will continue. This article investigates that basic assumption through examination of the interindustry patterns of one local economy, in the monthly employment data for 14 industries over a 34-year period