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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Citation

Herskovic, Bernard, Bryan Kelly, Hanno Lustig, and Stijn Van Nieuwerburgh. "Firm Volatility in Granular Networks." Journal of Political Economy (forthcoming).

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