Firm Volatility in Granular Networks

66 Pages Posted: 7 Dec 2012 Last revised: 15 Oct 2013

Bryan T. Kelly

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 27, 2013

Abstract

We propose a model of firm volatility based on customer-supplier connectedness. We assume that 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. When the size distribution becomes more dispersed, economic activity is concentrated among a smaller number of firms, the typical supplier becomes less diversified and its volatility increases. The model is consistent with a set of new stylized facts. At the macro level, the firm volatility distribution is driven by firm size dispersion; the latter explains common movements in firm-level total and residual volatility. At the micro level, we show that the concentration of customer networks is an important determinant of firm-level volatility.

Keywords: Volatility, networks, firm growth, firm volatility

JEL Classification: G12, G15, F31

Suggested Citation

Kelly, Bryan T. and Lustig, Hanno N. and Van Nieuwerburgh, Stijn, Firm Volatility in Granular Networks (March 27, 2013). Fama-Miller Working Paper; Chicago Booth Research Paper No. 12-56. Available at SSRN: https://ssrn.com/abstract=2186197 or http://dx.doi.org/10.2139/ssrn.2186197

Bryan T. Kelly (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Hanno N. Lustig

Stanford Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Stijn Van Nieuwerburgh

New York University Stern School of Business, Department of Finance ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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