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:	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.