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