NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Firm Volatility in Granular Networks

Bryan Kelly, Hanno Lustig, Stijn Van Nieuwerburgh

NBER Working Paper No. 19466
Issued in September 2013
NBER Program(s):Asset Pricing, Corporate Finance, Economic Fluctuations and Growth

We propose a network model of firm volatility in which the customers' growth rate shocks influence the growth rates of their suppliers, larger suppliers have more customers, and the strength of a customer-supplier link depends on the size of the customer firm. Even though all shocks are i.i.d., the network model produces firm-level volatility and size distribution dynamics that are consistent with the data. In the cross section, larger firms and firms with less concentrated customer networks display lower volatility. Over time, the volatilities of all firms co-move strongly, and their common factor is concentration of the economy-wide firm size distribution. Network effects are essential to explaining the joint evolution of the empirical firm size and firm volatility distributions.

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Document Object Identifier (DOI): 10.3386/w19466

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