Discussion paper

DP12284 Firm Volatility in Granual Networks

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.


Van Nieuwerburgh, S, H Lustig and B Kelly (2017), ‘DP12284 Firm Volatility in Granual Networks‘, CEPR Discussion Paper No. 12284. CEPR Press, Paris & London. https://cepr.org/publications/dp12284