47 Pages Posted: 7 Dec 2012 Last revised: 31 Aug 2017
Date Written: August 31, 2017
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.
Keywords: Firm volatility, networks, firm size distribution, aggregate volatility, granularity
JEL Classification: E3, E20, G1, L14, L25
Suggested Citation: Suggested Citation
Herskovic, Bernard and Kelly, Bryan T. and Lustig, Hanno N. and Van Nieuwerburgh, Stijn, Firm Volatility in Granular Networks (August 31, 2017). Fama-Miller Working Paper; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=2186197 or http://dx.doi.org/10.2139/ssrn.2186197
By Andrew Ang