DP12284 Firm Volatility in Granual Networks
|Author(s):||Bernard Herskovic, Bryan Kelly, Hanno Lustig, Stijn van Nieuwerburgh|
|Publication Date:||September 2017|
|Keyword(s):||aggregate volatility, firm size distribution, Firm volatility, granularity, networks|
|JEL(s):||E20, E3, G1, L14, L25|
|Programme Areas:||Financial Economics|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12284|
Firm volatilities co-move strongly over time, and their common factor is the dispersion of the economy-wide firm size distribution. In the cross section, smaller firms and firms with a more concentrated customer base display higher volatility. Network effects are essential to explaining the joint evolution of the empirical firm size and firm volatility distributions. We propose and estimate a simple network model of firm volatility in which shocks to customers influence their suppliers. Larger suppliers have more customers and the strength of a customer-supplier link depends on the size of the customer. The model produces distributions of firm volatility, size, and customer concentration that are consistent with the data.