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

Bernard Herskovic, Bryan Kelly, Hanno Lustig, Stijn Van Nieuwerburgh

NBER Working Paper No. 19466
Issued in September 2013, Revised in June 2020
NBER Program(s):Asset Pricing, Corporate Finance, Economic Fluctuations and Growth

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 customer-supplier links depend on customers size. The model produces distributions of firm volatility, size, and customer concentration consistent with the data.

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Document Object Identifier (DOI): 10.3386/w19466

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