Firm Volatility in Granular Networks

Bernard Herskovic, Bryan Kelly, Hanno Lustig and Stijn Van Nieuwerburgh

Journal of Political Economy, 2020, vol. 128, issue 11, 4097 - 4162

Abstract: Firm volatilities comove 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 customer-supplier links depend on customers’ size. The model produces distributions of firm volatility, size, and customer concentration consistent with the data.

Date: 2020
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Related works:
Working Paper: Firm Volatility in Granual Networks (2017)
Working Paper: Firm Volatility in Granular Networks (2014)
Working Paper: Firm Volatility in Granular Networks (2013)
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