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Firm Volatility in Granular Networks

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.

Authors: 
Bryan T. Kelly, University of Chicago Booth School of Business
Hanno N. Lustig, University of California, Los Angeles
Stijn Van Nieuwerburgh, New York University
Publication Date: 
March, 2013
BFI Initiative: 
Publication Type: 
Institution: 
University of Chicago
Series: 
Chicago Booth School of Business Research Paper Series
Document Number: 
12-56