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Is interest rate uncertainty a predictor of investment volatility? evidence from the wild bootstrap likelihood ratio approach

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  • Godwin Olasehinde-Williams

    (University of Ilorin
    Istanbul Ticaret University)

  • Oktay Özkan

    (Tokat Gaziosmanpasa University)

Abstract

This paper investigates the ability of interest rate uncertainty to predict investment volatility in nine selected countries. Employing a novel wild bootstrap likelihood ratio approach, the study shows interest rate uncertainty to be a significant predictor of investment volatility in all but one of the sampled countries. Overall, we find that interest rate uncertainty aggravates investment volatility in the United States, Germany, France, Italy, Spain, United Kingdom, Japan and Sweden. The results remain the same irrespective of whether a 3-month forecast horizon or a 12-month forecast horizon is used. The implication of the study finding is that the current value of investments more often than not fluctuates in response to uncertain interest rate changes. This suggests that the investment rate is not only dependent on the interest rate level, but on the degree of uncertainty in interest rate movements as well. Interest rate uncertainty is thus an important factor to be considered in investment analysis. This study thus encourages central banks to pay significant attention to interest rate stability due to its ability to minimize the distortions in the market mechanism for raising long-term capital.

Suggested Citation

  • Godwin Olasehinde-Williams & Oktay Özkan, 2022. "Is interest rate uncertainty a predictor of investment volatility? evidence from the wild bootstrap likelihood ratio approach," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(3), pages 507-521, July.
    • Handle: RePEc:spr:jecfin:v:46:y:2022:i:3:d:10.1007_s12197-022-09570-2
    DOI: 10.1007/s12197-022-09570-2
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    More about this item

    Keywords

    Interest rate uncertainty; Investment volatility; Wild bootstrap likelihood ratio test;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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