Upstream, Downstream & Common Firm Shocks

111 Pages Posted: 25 Apr 2022

See all articles by Everett Grant

Everett Grant

Federal Reserve Banks - Federal Reserve Bank of Dallas

Julieta Yung

Federal Deposit Insurance Corporation

Date Written: April 2022

Abstract

We develop a quantitative approach to evaluate the roles of upstream (supplier-to-user), downstream (user-to-supplier) and common factor shock transmission across firms. Inter-firm networks are estimated from U.S. equities over 1989-2017 using machine learning techniques. We then employ a multi-sector DSGE model as a lens through which to interpret them and calculate sectoral exposures from input-output tables. We find that: (i) common factors drive an increasing variance share of returns; (ii) equity return based networks reflect real interconnections across firms, with supplier disruptions being more prominent than downstream exposures; (iii) removing the impact of common factors is increasingly important for revealing inter-firm connections.

Keywords: Firm networks, Upstream versus downstream, Input-output linkages, Shock propagation, Aggregate shocks, Equity returns

JEL Classification: C32, C55, E23, E44, G01

Suggested Citation

Grant, Everett and Yung, Julieta, Upstream, Downstream & Common Firm Shocks (April 2022). FDIC Center for Financial Research Paper No. 2022-04, Available at SSRN: https://ssrn.com/abstract=4090645 or http://dx.doi.org/10.2139/ssrn.4090645

Everett Grant (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Julieta Yung

Federal Deposit Insurance Corporation ( email )

550 17th Street NW
Washington, DC 20006

HOME PAGE: http://https://www.fdic.gov/analysis/cfr/

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