Discussion Paper Details

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Title: Firm Volatility in Granual Networks

Author(s): Bernard Herskovic, Bryan Kelly, Hanno Lustig and Stijn van Nieuwerburgh

Publication Date: September 2017

Keyword(s): aggregate volatility, firm size distribution, Firm volatility, granularity and networks

Programme Area(s): Financial Economics

Abstract: 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.

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Bibliographic Reference

Herskovic, B, Kelly, B, Lustig, H and van Nieuwerburgh, S. 2017. 'Firm Volatility in Granual Networks'. London, Centre for Economic Policy Research.